<PAGE>
Table of Contents
Chairperson's Letter 2
MainStay California Tax Free Fund Highlights 4
$10,000 Invested in the MainStay California
Tax Free Fund versus Lehman Brothers
Municipal Bond Index and Inflation--
Class A & Class B Shares 5
Portfolio Management Discussion and Analysis 6
Year-by-Year & Six-Month Performance 7
Diversification of Holdings--Top 5 8
Quality Breakdown 9
Returns & Lipper Rankings 10
Portfolio of Investments 11
Unaudited Financial Statements 13
Notes to Financial Statements 17
The MainStay Funds 22
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
Chairperson's Letter
After a remarkable six-year period of expansion, the U.S. economy continued to
grow throughout the first half of 1997. For most investors, the overall impact
was positive, but there were some rough seas along the way.
As the stock market made gains early in the year, concerns about the possibility
of impending inflation brought increased price volatility. In late March, the
Federal Reserve Board moved to raise interest rates in an effort to slow
economic growth. Although this preemptive strike helped keep inflation in check,
the initial reaction from both the stock and bond markets was negative. As a
result, bond prices faltered and stocks tumbled more than 9% from their peak
before both markets began to stabilize.
As employment figures, earnings estimates, and other indicators began to suggest
that economic growth was slowing in the second quarter, the stock market not
only recovered lost ground, but soared to record highs. With higher valuations,
however, the market became increasingly volatile, reacting severely to any news
that could signal a shift in buying patterns or interest rates.
Positive performance, emerging concerns
Despite the volatility, domestic stock and bond markets closed the first half of
1997 with positive returns. While Malaysia and Singapore had negative results,
most international markets performed well. Given these results, many investors
are once again celebrating their good fortune. The underlying volatility,
however, should serve to remind us that the level of growth we've enjoyed for
more than six years is not typical market behavior.
Certainly no one can predict what will happen next, so it's important to keep
recent performance in perspective. We believe that having realistic
expectations, as well as a long-range plan and diversified investments can help
you work toward achieving your goals, wherever the markets may move.
Solid team approach
At MainStay(R), we believe our risk-averse approach can help provide reassurance
to many investors, particularly in uncertain times. Each MainStay Fund is
managed by a team of experienced professionals who employ disciplined investment
strategies to seek competitive returns with careful attention to downside risk.
Our team approach offers investors a combination of experience, insight, and
market perspective that few individuals could provide on their own. It also
helps provide important checks and balances in security selection, market
evaluation, and overall accountability.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
Our Fund managers believe that strong companies tend to get stronger in up
markets and perform better than average when the markets go down. Using
selection criteria appropriate to the individual Funds they manage, they may
look for specific catalysts that are likely to stimulate growth, enhance value,
or increase yield without taking on unnecessary risk.
Looking forward
As we move into the second half of 1997, we expect that an intensified focus on
inflation, interest rates, and corporate earnings will account for much of the
momentum driving the market. Regardless of how events unfold, you can be
confident that we will hold true to our disciplined management approach.
At MainStay, we believe that having a close relationship with your Registered
Representative is one of the best ways to keep your long-term focus in any
market environment. Therefore, we urge you to speak with your Registered
Representative regularly--whether the market happens to be up or down--so he or
she can understand your needs and help keep you on a steady course.
While we've seen positive results for the first half of the year, we remain
somewhat cautious. Whatever the future brings, we'll continue to provide the
information, service, and support you can consider when making decisions--and
the prudent management you depend on to pursue your long-range goals.
Sincerely,
/s/ Alice T. Kane
Alice T. Kane
July 1997
- --------------------------------------------------------------------------------
3
<PAGE>
MainStay California Tax Free Fund Highlights
MARKET HIGHLIGHTS
FOR THE 6 MONTHS ENDED 6/30/97
- --------------------------------------------------------------------------------
o With Orange County difficulties fading into distant memory, the first half
of 1997 was a relatively uneventful period in the California municipal bond
market.
o Although the Federal Funds rate increased in March, economic growth slowed
in the second quarter and the market tended to trade in a relatively narrow
range for most of the first half of the year.
o Stock market gains reduced demand for California municipal bonds, but low
new issuance helped keep supply manageable.
o High-coupon, short-duration bonds did better in the first quarter and
low-coupon, long-duration bonds did better in the second quarter.
- --------------------------------------------------------------------------------
FUND HIGHLIGHTS FOR THE
6- AND 12-MONTH PERIODS ENDED 6/30/97
- --------------------------------------------------------------------------------
o One-year total returns of 7.12% and 7.00% for Class A and Class B shares,
respectively, excluding all sales charges, as of 6/30/97.
o Selected buy and sell opportunities provided the Fund with increased total
return.
o While the Fund did not make any major duration calls, having a slightly
longer-than-neutral duration when interest rates rose in late March had a
negative impact on performance.
o Both share classes underperformed the average Lipper* California municipal
debt fund for the six months ended 6/30/97.
- --------------------------------------------------------------------------------
- ----------
* See footnote + and table on page 10 for more information on Lipper
Analytical Services, Inc.
4
<PAGE>
$10,000 Invested in the MainStay
California Tax Free Fund versus
Lehman Brothers Municipal Bond
Index and Inflation
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
MainStay
California Lehman Brothers
Period End Tax Free Fund Municipal Bond Index* Inflation+
- ---------- ------------- --------------------- ----------
<S> <C> <C> <C>
10/1/91 $ 9,550.00 $10,000.00 $10,000.00
12/91 $ 9,747.60 $10,335.00 $10,051.00
12/92 $10,516.00 $11,247.00 $10,349.00
12/93 $11,852.00 $12,628.00 $10,632.00
12/94 $11,273.00 $11,975.00 $10,908.00
12/95 $12,984.00 $14,066.00 $11,192.00
12/96 $13,430.00 $14,689.00 $11,563.00
6/97 $13,737.00 $15,159.00 $11,642.00
</TABLE>
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
MainStay
California Lehman Brothers
Period End Tax Free Fund Municipal Bond Index* Inflation+
- ---------- ------------- --------------------- ----------
<S> <C> <C> <C>
10/1/91 $10,000.00 $10,000.00 $10,000.00
12/91 10,206.90 10,335.00 10,051.00
12/92 11,011.00 11,247.00 10,349.00
12/93 12,410.00 12,628.00 10,632.00
12/94 11,804.00 11,975.00 10,908.00
12/95 13,564.00 14,066.00 11,192.00
12/96 13,984.00 14,689.00 11,563.00
6/97 14,159.00 15,159.00 11,642.00
</TABLE>
- ----------
The Class A graph assumes an initial investment of $10,000 made on 10/1/91
reflecting the effect of the 4.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,550. The Class B graph assumes
an initial investment of $10,000 made on 10/1/91 and includes the
historical performance of the Class A shares for periods from inception
(10/1/91) through 12/31/94. Returns shown reflect the Contingent Deferred
Sales Charge (CDSC) of 1%, as it would apply for the period shown. (The
$10,000 invested in the Lehman Brothers Municipal Bond Index begins on
9/30/91.) All results include reinvestment of distributions at net asset
value and the change in share price for the stated period. Past performance
is no guarantee of future results.
* The Lehman Brothers Municipal Bond Index (which does not have a sales
charge) includes approximately 15,000 municipal bonds rated Baa or better
by Moody's with a maturity of at least two years. Bonds subject to the
Alternative Minimum Tax or with floating or zero coupons are excluded. The
Index is unmanaged and results assume the reinvestment of all income and
capital gain distributions.
+ Inflation is represented by the Consumer Price Index (CPI), which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.
[GRAPHIC]
5
<PAGE>
Portfolio Management Discussion and Analysis
For the first six months of 1997, the California municipal bond market was
relatively quiet. With Orange County's difficulties slipping into distant
memory, there were no major disturbances or credit concerns. Overall, California
continues to benefit from diversifying its economy away from defense and into
banking, financials, computers, tourism, and exports.
Although the market rallied a little in the beginning of the year, prices
declined in March as the economy appeared to be heating up. When the Federal
Reserve Board moved to raise interest rates, prices dropped even further, but in
the second quarter, moderate economic growth led to a rally in bond prices.
Overall, municipals tended to trade within a relatively narrow range over the
first half of the year, without any major incidents or market upsets.
Supply and demand were affected by stock market gains, which drew money away
- -----------------
from the California municipal bond market. Fortunately, new issuance was low,
which reduced supply and helped the market deal with weakening demand.
Liquidity continued to decline, yield spreads tightened, and several
-------------
broker/dealers left the municipal market to pursue higher profit potential
elsewhere. Municipal quality generally increased as the cost of insurance
continued to decline for new issues. With fewer issues offering yield
advantages, individual security selection became increasingly important in
identifying municipal bond opportunities.
Given this context, how did the MainStay California Tax Free Fund do during the
first half of 1997?
For the six months ended 6/30/97, the MainStay California Tax Free Fund returned
2.29% and 2.28% for Class A shares and Class B shares, respectively, excluding
all sales charges. Both share classes underperformed the average Lipper*
California municipal debt fund, which returned 2.82% over the reporting period.
What factors were the major contributors to the Fund's underperformance?
In the first quarter, we believed inflation would remain modest and economic
growth would continue to be favorable. As a result, the Fund had a slightly
longer duration than our competitors when the Federal Reserve Board moved to
--------
raise interest rates, which negatively impacted performance. Although we quickly
went back to a neutral duration for the Fund and have remained there since, the
Fund suffered a setback that would take much of the second quarter to undo.
How did you seek to provide attractive yields for municipal investors?
With the increase in insured credits, today about half of the municipal issues
---------------
available are rated AAA or carry insurance that gives them equivalent
characteristics. As a result, it's easy to find quality, but difficult to find
[GRAPHIC]
Supply and demand
- -----------------
In the bond market, supply is influenced by the amount of new securities issued
and the amount of bonds investors wish to sell. Demand reflects the amount of
bonds investors wish to buy, which may decrease when other markets offer greater
opportunities.
Yield spread
- ------------
The difference in yield between securities in different market sectors, such as
Treasury securities and municipal bonds--or between different securities in a
single sector, such as municipal bonds with different credit ratings.
Duration
- --------
A measure of average maturity, which adjusts for the time value of the payments
investors will receive, and which takes into account interest payments as well
as principal payments. Duration is a better gauge of interest-rate sensitivity
than average maturity alone.
- ----------
* See footnote and table on page 10 for more information on Lipper Analytical
Services, Inc.
6
<PAGE>
YEAR-BY-YEAR & SIX-MONTH PERFORMANCE
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Period-end Total Return %
- -------------------------------------------------------
<S> <C>
12/91 2.07
12/92 7.88
12/93 12.71
12/94 -4.92
12/95 15.18 Class A
12/95 14.91 Class B
12/96 3.44 Class A
12/96 3.10 Class B
6/97 2.29 Class A
6/97 2.28 Class B
</TABLE>
- ----------
Returns are for Class A shares unless otherwise noted. See footnote * on page 10
for more information on performance.
yield. We have reduced the Fund's holdings among AA-rated and A-rated paper,
which we believe offer insufficient yield advantages relative to the highest
quality securities. Instead, we've looked for opportunities in BBB-rated paper.
We believe these securities offer potentially higher yields, but there are a
limited number of BBB California issues that are available at the prices we
want.
If you want higher yields, why not invest in noninvestment-grade securities?
While some of our competitors have invested in high-yield municipals to improve
their returns, the MainStay California Tax Free Fund is unable to do so.
According to the prospectus, the Fund may not invest in any securities rated
below "medium grade." The Fund's BBB-rated bonds have provided competitive
returns, but we don't want to compromise quality for yield. In fact, the overall
quality rating of the Fund's investment portfolio is AA, which we feel is
appropriate for the Fund's investors and our risk-management strategy at this
time.
Are there other steps you take to manage risk?
Yes, we seek to diversify geographically within the state as well as in the
types of issues we buy. As a result, the Fund owns everything from water, air,
and school bonds to hospital, utility, and toll-road securities. Of course, with
a single-state fund, the opportunities for diversification are naturally
limited.
How do you seek to protect yields over time?
Since we're investing for the long-term, we need to watch when the Fund's bonds
can be called--redeemed by the issuer prior to their stated maturity--to provide
the Fund's investment portfolio with a measure of call protection and reduce the
probability of having to reinvest at unattractive rates. During the first half
of the year, we've been continually extending our call dates with newer or
longer issues. While many of these transactions are neutral in terms of
performance, the net effect is to help improve call protection for the Fund's
investors.
[GRAPHIC]
Insured credits
- ---------------
Bonds that carry insurance or other guarantees that interest and principal
payments will be met. Although such insurance may increase the cost of the bond,
it also reduces the risk of default, regardless of the issuer's credit quality.
7
<PAGE>
DIVERSIFICATION OF HOLDINGS--TOP 5 AS OF 6/30/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Percentage
- ------------------------------------------------------------
<S> <C>
Water Utility 13.6%
State - General Obligation 12.8%
Education/Dormitory 12.5%
Public Works/Community Development/Pension 10.6%
Transportation 10.1%
All Other 40.4%
</TABLE>
- ------------
Actual percentages will vary over time.
What were some of the Fund's best performing securities during the reporting
period?
The Fund had several long-duration zero-coupon bonds that were strong
performers, particularly in the second quarter. Among them were Foothill Toll
Road, Clovis School District, Escondido High School District, and Anaheim Public
Finance bonds. We also purchased some new-issue Puerto Rican Building Authority
bonds at a low price and sold them quickly at a profit.
Were there other pockets of strong performance?
Yes. Generally speaking, high-coupon, short-duration bonds did well in the first
quarter. Low-coupon, long-duration bonds performed better in the second quarter.
We also bought other bonds when the market was relatively low. An example might
be Los Angeles County California Public Works 5 1/8% bonds maturing in 2029.
This issue has done well as the market has risen.
Which securities underperformed during the first half of the year?
The Fund's Southern California Public Power Authority 4 7/8% bonds didn't do
well. Not only was their coupon category out of favor, but we sold them at a low
point in the market. Several short-duration bonds also underperformed,
particularly in the second quarter, despite their higher coupons. These included
Irvine School District, Oakland California Revenue, and some California
Pollution Control bonds.
Were there other securities that didn't perform as you had hoped?
Last year, we had been selling off the Fund's 4 3/4% coupon bonds, but retained
one in the Fund's investment portfolio. We found it underperformed during the
first half of the year due to lack of demand.
[GRAPHIC]
8
<PAGE>
What is your outlook going forward?
We're currently maintaining a neutral duration, but revisiting that decision
weekly. We believe that if growth remains moderate and inflation doesn't heat
up, it should be good for bonds. But with low unemployment, wage increases could
trigger inflation, so the future remains uncertain. We'll continue to manage the
portfolio seeking a high level of current income free from regular federal
income tax and California personal income tax,+ consistent with the preservation
of capital.
Ravi Akhoury
James Flood
Portfolio Managers
QUALITY BREAKDOWN AS OF 6/30/97
<TABLE>
<CAPTION>
Percentage
----------
<S> <C>
AAA 61.7%
AA 5.8%
A 21.0%
BBB 11.5%
</TABLE>
- ----------
Actual percentages will vary over time. Bond quality ratings provided by
Standard & Poor's.
See the prospectus for details.
[GRAPHIC]
- ----------
+ A small portion of income may be subject to state and local taxes and the
Alternative Minimum Tax. Capital gains, if any, may also be taxed.
9
<PAGE>
Returns & Lipper Rankings as of 6/30/97
<TABLE>
<CAPTION>
Fund average annual total returns*
- --------------------------------------------------------------------------------
1 year 5 years Life of Fund through 6/30/97
<S> <C> <C> <C>
Class A 7.12% 6.32% 6.52%
Class B 7.00% 6.20% 6.42%
- --------------------------------------------------------------------------------
<CAPTION>
Fund SEC returns*
- --------------------------------------------------------------------------------
1 year 5 years Life of Fund through 6/30/97
<S> <C> <C> <C>
Class A 2.30% 5.34% 5.67%
Class B 2.00% 5.88% 6.29%
- --------------------------------------------------------------------------------
<CAPTION>
Fund Lipper+ rankings & Lipper category returns as of 6/30/97
- --------------------------------------------------------------------------------
1 year 5 years Life of Fund through 6/30/97
<S> <C> <C> <C>
Class A 87 out of 34 out of 34 out of
101 funds 50 funds 47 funds
Class B 92 out of n/a n/a
101 funds
Average Lipper
CA municipal
debt fund 8.07% 6.55% 6.87%
- --------------------------------------------------------------------------------
<CAPTION>
Fund per share net asset values & distributions for the six months ended 6/30/97
- --------------------------------------------------------------------------------
NAV 6/30/97 Income Capital Gains
<S> <C> <C> <C>
Class A $9.76 $0.2400 $0.0000
Class B $9.74 $0.2280 $0.0000
- --------------------------------------------------------------------------------
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested. Performance figures
reflect the assumption of certain Fund expenses by the Fund's administrator
and adviser. Had these expenses not been assumed, total return figures
would have been lower. This expense limitation may be terminated or revised
at any time.
Class B shares, first offered to the public on 1/3/95, are sold with no
initial sales charge, but are subject to a maximum CDSC of up to 5% if
shares are redeemed during the first 6 years of purchase and an annual
12b-1 fee of up to .50%. Performance figures for this class include the
historical performance of the Class A shares from inception (10/1/91) up to
12/31/94. Performance data for the two classes after this date vary based
on differences in their expense structures. Class A shares are sold with a
maximum initial sales charge of 4.5% and a 12b-1 fee of .25%.
+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales
charges. Lipper averages listed above are not class specific. Life of Fund
return is from the period of the Class A shares' initial offering through
6/30/97. Class B shares were first offered to the public on 1/3/95; Class A
shares on 10/1/91.
[GRAPHIC]
10
<PAGE>
Portfolio of Investments June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
Principal
Amount Value
-------------------------
LONG-TERM MUNICIPAL BONDS (100.0%)+
<S> <C> <C>
CALIFORNIA (100.0%)
Anaheim California Public Financing
Authority, Lease Revenue
Project C
(zero coupon), due 9/1/22 ............. $1,500,000 $ 350,625
Series A
5.00%, due 3/1/37 ..................... 500,000 448,125
Baldwin Park California Unified
School District
(zero coupon), due 8/1/17 ............. 1,255,000 398,463
California Educational Facility Authority
Revenue, Pooled College & University
Project B
6.30%, due 4/1/21 ..................... 500,000 511,875
California Housing Finance Agency
Revenue, Home Mortgage
Series E
6.10%, due 8/1/29 (a) ................. 600,000 612,000
Series C
8.30%, due 8/1/19 (a) ................. 25,000 25,813
California Pollution Control Financing
Authority Revenue
Pacific Gas & Electric Co.
Series B
8.875%, due 1/1/10 (a) ................ 750,000 778,747
San Diego Gas & Electric Co.
Series A
5.90%, due 6/1/14 ..................... 400,000 421,500
California State Department, Water
Resources Central Valley Project
Revenue, Water System
Series Q
5.375%, due 12/1/27 ................... 1,000,000 966,250
California State General Obligation
5.375%, due 6/1/26 .................... 1,000,000 970,000
Veterans, Series AW
7.70%, due 4/1/12 (a) ................. 880,000 918,579
California Statewide Community
Development Corp.
5.00%, due 10/1/23 .................... 1,000,000 916,250
7.00%, due 9/1/09 ..................... 285,000 308,869
East Bay California Municipal Utilities
District Water System Revenue
4.75%, due 6/1/21 ..................... 1,000,000 881,250
Eden Township Hospital District
Revenue
7.40%, due 11/1/19 .................... 770,000 816,200
Escondido California Union High
School District
(zero coupon), due 11/1/12 ............ 1,350,000 583,875
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
<TABLE>
<CAPTION>
Principal
Amount Value
-------------------------
CALIFORNIA (Continued)
<S> <C> <C>
Foothill-Eastern Transportation
Corridor Agency, Toll Road
Revenue, Series A
(zero coupon), due 1/1/24 ............. $3,000,000 $ 588,750
(zero coupon), due 1/1/27 ............. 1,000,000 160,000
Irvine California Unified School District
Special Tax Community Facilities
Series A
8.10%, due 11/15/13 ................... 1,250,000 1,342,188
Los Angeles California Harbor
Department Revenue
8.70%, due 9/1/15 ..................... 540,000 590,625
Los Angeles County
Metropolitan Transportation
Authority, Sales Tax Revenue
Series A
5.00%, due 7/1/25 ..................... 1,050,000 960,750
Los Angeles County
Public Works Financing
Authority, Lease Revenue
Project V-B
5.125%, due 12/1/29 ................... 400,000 369,500
Los Angeles County
Transportation Commission, Sales
Tax Revenue, Series A
7.40%, due 7/1/15 ..................... 400,000 428,500
Metropolitan Water District, Southern
California Waterworks Revenue
Series C
5.00%, due 7/1/37 ..................... 300,000 268,875
Mojave California Water Agency
Improvement District, Morongo
Basin
5.80%, due 9/1/22 ..................... 1,000,000 1,012,500
Northern California Power Agency
Public Power Revenue
Hydroelectric Project 1
7.15%, due 7/1/24 ..................... 1,470,000 1,529,432
Oakland California Revenue
Series A
7.60%, due 8/1/21 ..................... 1,050,000 1,107,834
Riverside California Hospital Revenue
Riverside Community Hospital
Series A
6.75%, due 11/1/15 .................... 515,000 527,169
Sacramento California Municipal
Utilities District Electric Revenue
Series K
5.25%, due 7/1/24 ..................... 250,000 239,375
San Diego California Public Facilities
Financing Authority, Sewer Revenue
Series B
5.25%, due 5/15/27 .................... 1,000,000 956,400
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
<PAGE>
MainStay California Tax Free Fund
<TABLE>
<CAPTION>
Principal
Amount Value
-----------------------------
LONG-TERM MUNICIPAL BONDS (Continued)
<S> <C> <C>
CALIFORNIA (Continued)
San Francisco California
City & County Airport Commission
International Airport Revenue
Series 10B
5.50%, due 5/1/26...................... $1,000,000 $ 977,500
Santa Cruz County Public
Financing Authority Revenue
Tax Allocation, Series B
7.625%, due 9/1/21..................... 825,000 904,406
Walnut California Improvement
Agency Tax Allocation
7.90%, due 9/1/09...................... 750,000 794,063
-----------
22,666,288
-----------
Total Investments
(Cost $22,644,290) (b)................. 100.0% 22,666,288(c)
Cash and Other Assets,
Less Liabilities....................... 0.0(d) 8,983
---------- -----------
Net Assets............................... 100.0% $22,675,271
========== ===========
</TABLE>
- ----------
(a) Interest on these securities is subject to alternative minimum tax.
(b) The cost stated also represents the aggregate cost for Federal income tax
purposes.
(c) At June 30, 1997, net unrealized appreciation was $21,998, based on cost
for Federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $386,208 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $364,209.
(d) Less than one tenth of a percent.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE>
Statement of Assets and Liabilities as of June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investment in securities, at value (identified cost $22,644,290) ...... $ 22,666,288
Receivables:
Interest ............................................................ 341,488
Investment securities sold .......................................... 221,640
Fund shares sold .................................................... 125
Variation margin receivable on futures contracts ...................... 1,623
------------
Total assets ....................................................... 23,231,164
------------
LIABILITIES:
Payables:
Investment securities purchased ..................................... 244,627
Custodian ........................................................... 145,826
Dividends payable ................................................... 91,716
Fund shares redeemed ................................................ 14,602
NYLIFE Distributors ................................................. 10,173
Adviser ............................................................. 4,304
Transfer agent ...................................................... 3,355
Trustees ............................................................ 189
Accrued expenses ...................................................... 41,101
------------
Total liabilities .................................................. 555,893
------------
Net assets ............................................................ $ 22,675,271
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A ............................................................. $ 17,005
Class B ............................................................. 6,236
Additional paid-in capital ............................................ 22,685,605
Accumulated undistributed net investment income ....................... 9,347
Accumulated net realized loss on investments .......................... (64,920)
Net unrealized appreciation on investments ............................ 21,998
------------
Net assets ............................................................ $ 22,675,271
============
CLASS A
Net assets applicable to outstanding shares ........................... $ 16,604,696
============
Shares of beneficial interest outstanding ............................. 1,700,526
============
Net asset value per share outstanding ................................. $ 9.76
Maximum sales charge (4.50% of offering price) ........................ 0.46
------------
Maximum offering price per share outstanding .......................... $ 10.22
============
CLASS B
Net assets applicable to outstanding shares ........................... $ 6,070,575
============
Shares of beneficial interest outstanding ............................. 623,555
============
Net asset value and offering price per share outstanding .............. $ 9.74
============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
Statement of Operations for the six months ended June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Income:
Interest ............................................................ $ 709,689
------------
Expenses:
Administration ...................................................... 28,285
Advisory ............................................................ 28,285
Service ............................................................. 28,285
Shareholder communication ........................................... 19,847
Transfer agent ...................................................... 17,017
Professional ........................................................ 11,705
Custodian ........................................................... 8,483
Distribution--Class B ............................................... 6,554
Registration ........................................................ 1,668
Trustees ............................................................ 302
Miscellaneous ....................................................... 2,630
------------
Total expenses before reimbursement ................................ 153,061
Expense reimbursement from Adviser and Administrator .................. (5,926)
------------
Net expenses ....................................................... 147,135
------------
Net investment income ................................................. 562,554
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from:
Security transactions ............................................... 122,477
Futures transactions ................................................ (27,042)
------------
Net realized gain on investments ...................................... 95,435
------------
Net change in unrealized appreciation on investments:
Security transactions ............................................... (147,970)
Futures transactions ................................................ 844
------------
Net unrealized loss on investments .................................... (147,126)
------------
Net realized and unrealized loss on investments ....................... (51,691)
------------
Net increase in net assets resulting from operations .................. $ 510,863
============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six months
ended Year ended
June 30, December 31,
1997* 1996
------------ ------------
INCREASE (DECREASE) IN NET ASSETS:
<S> <C> <C>
Operations:
Net investment income ........................................................ $ 562,554 $ 1,111,565
Net realized gain (loss) on investments ...................................... 95,435 (24,010)
Net change in unrealized appreciation on investments ......................... (147,126) (279,939)
------------ ------------
Net increase in net assets resulting from operations ......................... 510,863 807,616
------------ ------------
Dividends to shareholders:
From net investment income:
Class A ..................................................................... (424,613) (950,302)
Class B ..................................................................... (131,723) (186,583)
------------ ------------
Total dividends to shareholders ........................................... (556,336) (1,136,885)
------------ ------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ..................................................................... 759,809 1,110,752
Class B ..................................................................... 1,166,397 3,213,809
Net asset value of shares issued to shareholders in reinvestment of dividends:
Class A ..................................................................... 210,291 549,718
Class B ..................................................................... 61,834 117,399
------------ ------------
2,198,331 4,991,678
Cost of shares redeemed:
Class A ..................................................................... (2,420,422) (3,046,980)
Class B ..................................................................... (244,636) (215,790)
------------ ------------
Increase (decrease) in net assets derived from capital share transactions . (466,727) 1,728,908
------------ ------------
Net increase (decrease) in net assets ..................................... (512,200) 1,399,639
NET ASSETS:
Beginning of period ............................................................ 23,187,471 21,787,832
------------ ------------
End of period .................................................................. $ 22,675,271 $ 23,187,471
============ ============
Accumulated undistributed net investment income ................................ $ 9,347 $ 3,129
============ ============
</TABLE>
- ----------
* Unaudited.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A
---------------------------------------------
September 1
Class A Class B Class A Class B Class A Class B through Year ended October 1,
------- ------- ------- ------- ------- ------- through August 31 1991(a)
Six months ended Year ended Year ended December 31 --------------- through
June 30, 1997* December 31, 1996 December 31, 1995 1994** 1994 1993 August 31, 1992
----------------- ----------------- ----------------- ----------- ---- ---- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ..... $9.78 $9.75 $9.95 $9.91 $9.10 $9.10 $9.57 $10.38 $ 9.90 $9.55
----- ----- ----- ----- ----- ----- ----- ------ ------ -----
Net investment income ..... 0.24 0.23 0.49 0.45 0.50 0.52 0.17 0.53 0.55 0.45
Net realized and
unrealized gain (loss)
on investments .......... (0.02) (0.01) (0.16) (0.16) 0.85 0.81 (0.47) (0.51) 0.64 0.30
----- ----- ----- ----- ----- ----- ----- ------ ------ -----
Total from investment
operations .............. 0.22 0.22 0.33 0.29 1.35 1.33 (0.30) 0.02 1.19 0.75
----- ----- ----- ----- ----- ----- ----- ------ ------ -----
Less dividends and
distributions:
From net investment
income .................. (0.24) (0.23) (0.50) (0.45) (0.50) (0.52) (0.17) (0.52) (0.59) (0.40)
From net realized gain
on investments .......... -- -- -- -- -- -- -- (0.31) (0.12) --
----- ----- ----- ----- ----- ----- ----- ------ ------ -----
Total dividends and
distributions ........... (0.24) (0.23) (0.50) (0.45) (0.50) (0.52) (0.17) (0.83) (0.71) (0.40)
----- ----- ----- ----- ----- ----- ----- ------ ------ -----
Net asset value at end
of period ............... $9.76 $9.74 $9.78 $9.75 $9.95 $9.91 $9.10 $9.57 $10.38 $9.90
===== ===== ===== ===== ===== ===== ===== ====== ====== =====
Total investment return (b) 2.29% 2.28% 3.44% 3.10% 15.18% 14.91% (3.11%) 0.12% 12.58% 8.02%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income ............... 5.03%+ 4.78%+ 5.0% 4.7% 5.3% 5.1% 5.5%+ 5.4% 5.6% 5.6%+
Net expenses ........... 1.24%+ 1.49%+ 1.24% 1.49% 1.24% 1.49% 0.99%+ 0.99% 0.99% 0.99%+
Expenses (before
reimbursement) ....... 1.29%+ 1.54%+ 1.3% 1.6% 1.4% 1.7% 1.2%+ 1.1% 1.2% 1.6%+
Portfolio turnover rate ... 44% 44% 79% 79% 107% 107% 24% 96% 154% 87%
Net assets at end of
period (in 000's) ....... $16,605 $6,071 $18,098 $5,089 $19,825 $1,963 $16,667 $17,356 $14,603 $10,085
</TABLE>
- ----------
* Unaudited.
** The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized.
(a) Commencement of operations.
(b) Total return is calculated exclusive of sales charges and is not annualized.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE>
Notes to Financial Statements (unaudited)
Note 1--Organization and Business:
The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business
Trust. The Trust is registered under the Investment Company Act of 1940, as
amended, (the "Act") as an open-end management investment company and is
comprised of fourteen funds. These financial statements and notes relate only to
MainStay California Tax Free Fund (the "Fund").
The Fund currently offers two classes of shares. Class A shares are offered at
net asset value per share plus an initial sales charge. Class B shares, whose
distribution commenced on January 3, 1995, are offered without an initial sales
charge, although a declining contingent deferred sales charge may be imposed on
redemptions made within six years of purchase. Class A shares and Class B shares
bear the same voting (except for issues that relate solely to one class),
dividend, liquidation and other rights and conditions except that the Class B
shares are subject to higher distribution fee rates. Each class of shares bears
distribution and/or service fee payments under a distribution plan pursuant to
Rule 12b-1 under the Investment Company Act of 1940.
Note 2--Significant Accounting Policies:
The following is a summary of significant accounting policies followed by the
Fund:
Valuation of Fund Shares. The net asset value per share of each class of shares
is calculated on each day the New York Stock Exchange (the "Exchange") is open
for trading as of the close of regular trading on the Exchange. The net asset
value per share of each class of shares is determined by taking the assets
attributable to a class of shares, subtracting the liabilities attributable to
that class, and dividing the result by the outstanding shares of that class.
Securities Valuation. Portfolio securities of the Fund are stated at value
determined (a) by appraising debt securities at prices supplied by a pricing
agent selected by the Adviser, whose prices reflect broker/dealer supplied
valuations and electronic data processing techniques if those prices are deemed
by the Adviser to be representative of market values at the regular close of
business of the New York Stock Exchange, (b) by appraising options and futures
contracts at the last sale price on the market where such options or futures are
principally traded, and (c) by appraising all other securities and other assets,
including debt securities for which prices are supplied by a pricing agent but
are not deemed by the Adviser to be representative of market values, but
excluding money market instruments with a remaining maturity of sixty days or
less and including restricted securities and securities for which no market
quotations are available, at fair value in accordance with procedures approved
by the Trustees. Short-term securities which mature in more than 60 days are
valued at current market quotations. Short-term securities which mature in 60
days or less are valued at amortized cost if their term to maturity at purchase
was 60 days or less, or by amortizing the difference between market value on the
61st day prior to maturity and value on maturity date if their original term to
maturity at purchase exceeded 60 days.
Events affecting the values of certain portfolio securities that occur between
the close of trading on the principal market for such securities and the regular
close of the New York Stock Exchange will not be reflected in
17
<PAGE>
MainStay California Tax Free Fund
the Fund's calculation of net asset value unless the Adviser believes that the
particular event would materially affect net asset value, in which case an
adjustment would be made.
Futures Contracts. A futures contract is an agreement to purchase or sell a
specified quantity of an underlying instrument at a specified future date, or to
make or receive a cash payment based on the value of a securities index. During
the period the futures contract is open, changes in the value of the contract
are recognized as unrealized gains or losses by "marking to market" such
contract on a daily basis to reflect the market value of the contract at the end
of each day's trading. The Fund agrees to receive from or pay to the broker an
amount of cash equal to the daily fluctuation in the value of the contract. Such
receipts or payments are known as "variation margin". When the futures contract
is closed, the Fund records a realized gain or loss equal to the difference
between the proceeds from (or cost of) the closing transaction and the Fund's
basis in the contract. The Fund has entered into contracts for the future
delivery of debt securities in order to attempt to protect against the effects
of adverse changes in interest rates or to lengthen or shorten the average
maturity or duration of the Fund's portfolio.
The use of futures contracts involves, to varying degrees, elements of market
risk. Risks arise from the possible imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets, and
the possible inability of counterparties to meet the terms of their contracts.
However, the Fund's activities in futures contracts are conducted through
regulated exchanges which minimize counterparty credit risks.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Dividends and Distributions to Shareholders. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
monthly. Income dividends and capital gain distributions are determined in
accordance with Federal income tax regulations which may differ from generally
accepted accounting principles.
Security Transactions and Investment Income. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Interest income is
accrued daily except when collection is not expected. Premiums on securities
purchased by the Fund are amortized on the constant yield method over the life
of the respective securities or, if applicable, over the period to the first
call date. Discounts are accreted when required by Federal tax regulations.
Expenses. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when allocations of direct expenses can otherwise fairly be
made. The investment income and expenses (other than expenses incurred under the
Distribution Plan) and realized and unrealized gains and losses on investments
of the Fund are allocated to separate classes
18
<PAGE>
Notes to Financial Statements (unaudited) continued
of shares based upon their relative net asset value on the date the income is
earned or expenses and realized and unrealized gains and losses are incurred.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
Concentration of Credit Risk. The Fund invests substantially all of its assets
in debt obligations issued by political subdivisions and authorities in the
State of California and the Commonwealth of Puerto Rico. The issuer's ability to
meet its obligations may be affected by economic and political developments in
the State of California and the Commonwealth of Puerto Rico.
Note 3--Fees and Related Party Policies:
Investment Advisory and Administration Fees. MacKay-Shields Financial
Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an
Investment Advisory Agreement. MacKay-Shields is a registered investment adviser
and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New
York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect
wholly-owned subsidiary of New York Life, is the Administrator for the Fund.
The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an annual
rate of 0.25% of the average daily net assets of the Fund.
The Adviser and the Administrator have voluntarily agreed to reimburse the
expenses for the Fund to the extent that operating expenses would exceed on an
annualized basis 1.24% and 1.49% for the Class A and Class B shares,
respectively, of the average daily net assets. The expense reimbursement to the
Fund for the six months ended June 30, 1997 was $5,926.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"). The
Fund, with respect to each class of shares, has adopted a Distribution Plan (the
"Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Class A Plan, the Distributor receives payments from the Fund at
an annual rate of 0.25% of the average daily net assets of the Fund's Class A
shares, which is an expense of the Class A shares of the Fund for distribution
or service activities as designated by the Distributor. Pursuant to the Class B
Plan, the Fund's Class B shares are subject to the payment of a monthly
distribution fee, which is an expense of the Class B shares of the Fund, at the
annual rate of 0.25% of the lesser of:
(a) the aggregate gross sales of the Fund's Class B shares since the inception
of the Fund (not including reinvestment of dividends or capital gains
distributions), less the aggregate net asset value of the Fund's Class B
19
<PAGE>
MainStay California Tax Free Fund
shares exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or upon which such charge has been
waived; or (b) the average daily net assets of the Fund's Class B shares.
The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund. Service fee as shown on the statement of
operations represents the fees for both Class A shares and Class B shares.
The Plan provides that the distribution fee is payable to NYLIFE Distributors
regardless of the amounts actually expended by NYLIFE Distributors for
distribution of the Fund's shares and service activities.
NYLIFE Distributors anticipates that its actual distribution expenditures will
substantially exceed the distribution fee received by it during the initial
years of the operation of the Plan and that in later years its expenditures may
be less than the distribution fee.
Sales Charges. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $3,800 for the six
months ended June 30, 1997. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges for redemptions of Class B shares of
$3,382 for the six months ended June 30, 1997.
Trustees Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee
of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus
reimbursement for travel and out-of-pocket expenses. The Trust allocates this
expense in proportion to the net assets of the respective Funds.
Capital. At June 30, 1997, NYLIFE Distributors and NYLIFE Securities held shares
of Class A with a net asset value of $2,646,153 and $97,600, respectively, which
represents 15.9% and 0.6%, respectively, of the Class A net assets at period
end.
Other. NYLIFE Distributors has received $603 for providing the Fund certain
transfer agency services for the period January 1, 1997, through April 30, 1997.
Effective May 1, 1997, MainStay Shareholder Services Inc. ("MSS"), an indirect
wholly owned subsidiary of New York Life Insurance Company, was appointed
Transfer, Dividend Disbursing and Shareholder Servicing Agent. MSS was paid $141
for services rendered May 1, 1997, through June 30, 1997.
Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $404 for the six months ended June
30, 1997.
20
<PAGE>
Notes to Financial Statements (unaudited) continued
Note 4--Federal Income Tax:
At December 31, 1996, for Federal income tax purposes, capital loss
carryforwards of $161,199 were available to the extent provided by regulations
to offset future realized gains of the Fund through 2004. To the extent that
these loss carryforwards are used to offset future capital gains, it is probable
that the capital gains so offset will not be distributed to shareholders.
Note 5--Purchases and Sales of Securities (in 000's):
During the six months ended June 30, 1997, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $9,913 and $9,860, respectively.
Note 6--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1997* December 31, 1996
================= =================
Class A Class B Class A Class B
======= ======= ======= =======
<S> <C> <C> <C> <C>
Shares sold ........................................................ 78 121 114 334
Shares issued in reinvestment of dividends ......................... 22 6 57 12
--- --- --- ---
100 127 171 346
Shares redeemed .................................................... (249) (25) (313) (22)
--- --- --- ---
Net increase (decrease) ............................................ (149) 102 (142) 324
=== === === ===
</TABLE>
- -----------
* Unaudited.
21
<PAGE>
The MainStay Funds
<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund graph indicating of companies in expanding markets and are willing to accept a higher
risk/reward of with strong growth potential level of risk for higher return potential
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in a portfolio that tracks You seek a conservative way to partici-
Equity Index Fund graph indicating the makeup and returns of the pate in the growth potential of stocks+
risk/reward of S&P 500*
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Offers broad diversification into You prefer the higher return potential
International Equity Fund graph indicating international stock markets with of international equities or want to
risk/reward of an emphasis on risk control add diversification to your domestic
Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Convertible Fund [Horizontal bar Invests in convertible securities for You want income from securities that
As of 6/2/97, this Fund graph indicating a special blend of long-term growth may offer growth potential if converted
was closed to new risk/reward of potential and dividend income into common stock
investors. Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Balances current income with growth You seek a combination of income and
Total Return Fund graph indicating opportunities by investing in stocks, growth potential and want to manage
risk/reward of bonds, and money market instruments risk through diversification
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks undervalued stocks with You seek to maximize total return from
Value Fund graph indicating attractive dividends and a stimulus securities which may have more poten-
risk/reward of for positive change tial than the market currently sees
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's.
+ The original investment is guaranteed provided it is held for 10 years with
all dividend and capital gain distributions reinvested. If shares are
redeemed prior to or after the one-day guarantee date, the investor loses
the benefit of the guarantee with respect to those shares.
++ Investments in foreign securities may be subject to greater risks than
domestic investments. These risks include currency fluctuations, changes in
U.S. or foreign tax or currency laws, and changes in monetary policies and
economic and political conditions in foreign countries.
(S) While individual securities owned by the Government Fund may be guaranteed
by the U.S. government and its agencies, the share price of the Fund is not
guaranteed and will fluctuate with market conditions.
|| Certain of the Fund's investments may be speculative.
# Investments in the Money Market Fund are neither insured nor guaranteed by
the U.S. government and there is no assurance that the Fund will be able to
maintain a stable net asset value of $1.00 per share; investment returns
will vary with market conditions.
** A small portion of the Fund's income may be subject to state and local
taxes and the Alternative Minimum Tax. Capital gains, if any, may also be
taxed.
22
<PAGE>
INCOME FUNDS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Seeks a high level of current income You are seeking to combine high
Government Fund graph indicating consistent with safety of principal current income and safety of principal
risk/reward of primarily from U.S. government
Fund] securities.(S)
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar An aggressive high-yield bond You want to maximize current income
High Yield graph indicating fund that is actively managed for and can accept the higher risk of
Corporate Bond Fund risk/reward of maximum current income|| securities with high yield potential
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current yields and You prefer the higher return potential
International Bond Fund graph indicating competitive total return from non- of international bonds or want to
risk/reward of U.S. bonds with an emphasis on add diversification to your domestic
Fund] risk control investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating stability of principal, and liquidity, competitive yields on cash you're plan-
risk/reward of with free checkwriting# ning to spend or invest in the near future
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks current income and competi- You seek to combine the return potential
Strategic Income Fund graph indicating tive overall return by investing in of high-grade, high-yield,|| and inter-
risk/reward of a diversified portfolio of domestic national bonds and want to manage risk
Fund] and foreign debt securities++ through multimarket diversification
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Seeks high current income exempt You are a California resident and want to
CALIFORNIA TAX FREE FUND graph indicating from both federal and California keep more of what you earn by invest-
risk/reward of income taxes consistent with ing for income that's double tax free**
Fund] preservation of capital**
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are a New York State or City resident
New York Tax Free Fund graph indicating from federal, New York State, and and want to keep more of what you earn
risk/reward of New York City income taxes consis- with income that's double or triple tax
Fund] tent with preservation of capital** free**
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are in a high federal income tax
Tax Free Bond Fund graph indicating from regular federal income tax con- bracket or want to pay less of your
risk/reward of sistent with preservation of capital** investment income to the IRS
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A word about risk and reward
The "thermometers" in the tables above show how much risk the investor must
assume and the related return potential. Generally speaking, investments with
higher return potential also carry higher risks. So, the longer the indicator
bar, the higher the risk and reward potential of the Fund.
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send any money. Shares
must be offered in the investor's state of residence.
23
<PAGE>
- --------------------------------------------------------------------------------
MAINSTAY
California Tax Free Fund
- --------------------------------------------------------------------------------
[GRAPHIC]
Semiannual Report
June 30, 1997
Unaudited
[LOGO] MAINSTAY(R)
FUNDS
OFFICERS & TRUSTEES
Alice T. Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
[LOGO] MAINSTAY(R) FUNDS
NYLIFE Distributors Inc.
Morris Corporate Center, Building A
300 Interpace Parkway
Parsippany, New Jersey 07054
Administrator & Distributor of The MainStay Funds
http://www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly owned subsidiary of
New York Life Insurance Company.
[LOGO] NEW YORK LIFE
This report is provided for the information of shareholders of the MainStay
California Tax Free Fund. It may be given to others only when preceded or
accompanied by an effective MainStay Funds prospectus. This report does not
offer to sell any securities or solicit orders to buy them.
(C)1997. All rights reserved. MSSA04-08/97
[GRAPHIC]
<PAGE>
Table of Contents
Chairperson's Letter 2
MainStay Capital Appreciation Fund
Highlights 4
$10,000 Invested in the MainStay
Capital Appreciation Fund versus S&P 500
and Inflation--Class A & Class B Shares 5
Portfolio Management Discussion and Analysis 6
Year-by-Year & Six-Month Performance 7
Diversification by Industry--Top 5 8
Portfolio Composition 10
Returns & Lipper Rankings 11
Top 10 Equity Holdings 12
10 Largest Purchases 12
10 Largest Sales 12
Portfolio of Investments 13
Unaudited Financial Statements 16
Notes to Financial Statements 20
The MainStay Funds 24
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
Chairperson's Letter
After a remarkable six-year period of expansion, the U.S. economy continued to
grow throughout the first half of 1997. For most investors, the overall impact
was positive, but there were some rough seas along the way.
As the stock market made gains early in the year, concerns about the possibility
of impending inflation brought increased price volatility. In late March, the
Federal Reserve Board moved to raise interest rates in an effort to slow
economic growth. Although this preemptive strike helped keep inflation in check,
the initial reaction from both the stock and bond markets was negative. As a
result, bond prices faltered and stocks tumbled more than 9% from their peak
before both markets began to stabilize.
As employment figures, earnings estimates, and other indicators began to suggest
that economic growth was slowing in the second quarter, the stock market not
only recovered lost ground, but soared to record highs. With higher valuations,
however, the market became increasingly volatile, reacting severely to any news
that could signal a shift in buying patterns or interest rates.
Positive performance, emerging concerns
Despite the volatility, domestic stock and bond markets closed the first half of
1997 with positive returns. While Malaysia and Singapore had negative results,
most international markets performed well. Given these results, many investors
are once again celebrating their good fortune. The underlying volatility,
however, should serve to remind us that the level of growth we've enjoyed for
more than six years is not typical market behavior.
Certainly no one can predict what will happen next, so it's important to keep
recent performance in perspective. We believe that having realistic
expectations, as well as a long-range plan and diversified investments can help
you work toward achieving your goals, wherever the markets may move.
Solid team approach
At MainStay(R), we believe our risk-averse approach can help provide reassurance
to many investors, particularly in uncertain times. Each MainStay Fund is
managed by a team of experienced professionals who employ disciplined investment
strategies to seek competitive returns with careful attention to downside risk.
Our team approach offers investors a combination of experience, insight, and
market perspective that few individuals could provide on their own. It also
helps provide important checks and balances in security selection, market
evaluation, and overall accountability.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
Our Fund managers believe that strong companies tend to get stronger in up
markets and perform better than average when the markets go down. Using
selection criteria appropriate to the individual Funds they manage, they may
look for specific catalysts that are likely to stimulate growth, enhance value,
or increase yield without taking on unnecessary risk.
Looking forward
As we move into the second half of 1997, we expect that an intensified focus on
inflation, interest rates, and corporate earnings will account for much of the
momentum driving the market. Regardless of how events unfold, you can be
confident that we will hold true to our disciplined management approach.
At MainStay, we believe that having a close relationship with your Registered
Representative is one of the best ways to keep your long-term focus in any
market environment. Therefore, we urge you to speak with your Registered
Representative regularly--whether the market happens to be up or down--so he or
she can understand your needs and help keep you on a steady course.
While we've seen positive results for the first half of the year, we remain
somewhat cautious. Whatever the future brings, we'll continue to provide the
information, service, and support you can consider when making decisions--and
the prudent management you depend on to pursue your long-range goals.
Sincerely,
/s/ Alice T. Kane
Alice T. Kane
July 1997
- --------------------------------------------------------------------------------
3
<PAGE>
MainStay Capital Appreciation Fund Highlights
MARKET HIGHLIGHTS
FOR THE 6 MONTHS ENDED 6/30/97
- --------------------------------------------------------------------------------
o The biggest influences on the stock market were interest rates in the first
quarter and earnings in the second quarter of 1997.
o Strong inflows into equities, particularly from foreign institutional
investors, helped boost performance.
o Low inflation, low interest rates, and moderate economic growth provided a
solid backdrop for growth investors.
o The market gave disproportional rewards to larger-capitalization issues
throughout the reporting period.
FUND HIGHLIGHTS FOR THE
6- AND 12-MONTH PERIODS ENDED 6/30/97
- --------------------------------------------------------------------------------
o One-year total returns of 22.69% and 22.08% for Class A shares and Class B
shares, respectively, excluding all sales charges, as of 6/30/97.
o Despite major setbacks in the first quarter, financial stocks rebounded
strongly in the second quarter and contributed significantly to the Fund's
performance.
o We increased the Fund's pharmaceutical and health care related holdings,
which also positively impacted the Fund's investment portfolio.
o While various company-specific setbacks detracted from performance, the
Fund managed to outperform the average Lipper* capital appreciation fund
for the reporting period.
- ------------------
* See footnote + and table on page 11 for more information on Lipper
Analytical Services, Inc.
4
<PAGE>
$10,000 Invested in the MainStay
Capital Appreciation Fund versus
S&P 500 and Inflation
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period- MainStay Capital
end S&P 500* Inflation+ Appreciation Fund
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
5/1/86 $10,000.00 $10,000.00 $ 9,450.00
12/86 $10,518.00 $10,193.00 $ 9,113.82
12/87 $11,070.00 $10,644.00 $ 8,915.07
12/88 $12,903.00 $11,113.00 $ 9,142.21
12/89 $16,983.00 $11,629.00 $11,524.50
12/90 $16,457.00 $12,355.00 $11,998.70
12/91 $21,460.00 $12,724.00 $20,201.50
12/92 $23,093.00 $13,100.00 $22,423.60
12/93 $25,412.00 $13,459.00 $25,565.90
12/94 $25,747.00 $13,809.00 $25,176.30
12/95 $35,412.00 $14,168.00 $34,185.90
12/96 $43,536.00 $14,637.00 $40,736.10
6/97 $52,512.00 $14,738.00 $46,041.00
</TABLE>
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period- MainStay Capital
end S&P 500* Inflation+ Appreciation Fund
- ------------------------------------------------------------------------------------------------
<S> <S> <C> <C>
5/1/86 $10,000.00 $10,000.00 $10,000.00
12/86 $10,518.00 $10,193.00 $ 9,644.25
12/87 $11,070.00 $10,644.00 $ 9,433.94
12/88 $12,903.00 $11,113.00 $ 9,674.30
12/89 $16,983.00 $11,629.00 $12,195.20
12/90 $16,457.00 $12,355.00 $12,697.00
12/91 $21,460.00 $12,724.00 $21,377.20
12/92 $23,093.00 $13,100.00 $23,728.70
12/93 $25,412.00 $13,459.00 $27,053.90
12/94 $25,747.00 $13,809.00 $26,641.60
12/95 $35,412.00 $14,168.00 $35,994.20
12/96 $43,536.00 $14,637.00 $42,674.30
6/97 $52,512.00 $14,738.00 $48,120.00
</TABLE>
- --------
The Class A graph assumes an initial investment of $10,000 made on 5/1/86
reflecting the effect of the 5.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,450 and includes the historical
performance of the Class B shares for periods from inception (5/1/86)
through 12/31/94. The Class B graph assumes an initial investment of
$10,000 made on 5/1/86. Returns shown do not reflect the Contingent
Deferred Sales Charge (CDSC), as it would not apply for the period shown.
All results include reinvestment of distributions at net asset value and
the change in share price for the stated period. Past performance is no
guarantee of future results.
* "Standard & Poor's 500 Composite Stock Price Index" and "S&P 500" are
registered trademarks of Standard & Poor's. The S&P 500 is an unmanaged
index and is considered to be generally representative of the U.S. stock
market. Results assume the reinvestment of all income and capital gain
distributions.
+ Inflation is represented by the Consumer Price Index (CPI), which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.
[GRAPHIC]
5
<PAGE>
Portfolio Management Discussion and Analysis
The first six months of 1997 was like a tale of two cities, with each quarter
having a distinctive story. Following a substantial rally early in the first
quarter, concern over inflation, interest rates, and rapid economic growth led
---------
to an equally substantial correction, or downward adjustment. While the S&P 500
----------
Index* advanced in the first quarter, the average stock fund declined.
In the second quarter, key indicators pointed to more moderate growth and
continued low inflation, both of which were positive for the stock market. While
past performance is no guarantee of future results, with investors focusing more
on earnings than interest rates, the stock market not only recovered lost
ground, but advanced far more in the second quarter than it typically has in an
entire year since 1926.+
Throughout the first half of 1997, certain themes emerged. Large-capitalization
--------------
issues were very strong and accounted for a major portion of the stock market's
gains. Tremendous volatility, both up and down, made news on a regular basis and
----------
accounted for much of the opportunity investors experienced. In June, the market
reached record levels several times. And while performance varied widely by
sector and issuer, overall returns were exceedingly strong.
How did the MainStay Capital Appreciation Fund do in this market environment?
For the six months ended 6/30/97, the MainStay Capital Appreciation Fund
returned 13.02% and 12.76% for Class A shares and Class B shares, respectively,
excluding all sales charges. That placed us ahead of the average Lipper++
capital appreciation fund, which returned 10.16% for the six months ended
6/30/97--and behind the average Lipper growth fund, which returned 14.28% for
the same period. During the first half of 1997, the S&P 500 advanced 20.62%.
What would you say made the biggest contribution to the Fund's performance?
Sticking to our management disciplines. Most of the Fund's underperformance in
the first quarter was due to five or six issues that did very well in the second
quarter and contributed positively to performance over the first half of the
year. As just one example, through our bottom-up approach to individual security
---------
selection, we began the year heavily overweighted in the financial sector. When
------------
the Federal Reserve Board moved to raise interest rates in late March, financial
stocks experienced a sudden and severe setback.
At various points along the way, we were tempted to sell financials and
reposition the Fund's investments. But when we looked at the fundamentals and
considered the likely impact--even if interest rates continued to rise--we still
felt these stocks were undervalued and offered tremendous growth potential. Our
decision to continue to hold them proved highly beneficial for the Fund when
financial stocks rallied in the second quarter. One financial stock that did
particularly well was First USA, which received a takeover bid from
[GRAPHIC]
Inflation
- ---------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
Correction
- ----------
A shift in security prices which brings them more in line with historically
appropriate levels.
Capitalization
- --------------
The amount of outstanding equity a company has issued. Companies may vary
greatly in the amount of equity capital they have raised, and their
capitalization may change with new issues or stock repurchases.
- ----------
* See page 5 for more information on the S&P 500 Index.
+ Source: Ibbotson Associates, Chicago. Used with permission. All rights
reserved. Average annual total return for 1926-1996 was 10.7%. Past
performance is no guarantee of future results.
++ See footnote and table on page 11 for more information on Lipper Analytical
Services, Inc.
6
<PAGE>
YEAR-BY-YEAR & SIX-MONTH PERFORMANCE
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period-end Total Return %
- --------------------------------------------------------------------
<S> <C>
12/86 -3.56
12/87 -2.18
12/88 2.55
12/89 26.06
12/90 4.12
12/91 68.36
12/92 11.00
12/93 14.01
12/94 -1.52
12/95 35.79 Class A
12/95 35.11 Class B
12/96 19.16 Class A
12/96 18.56 Class B
6/97 13.02 Class A
6/97 12.76 Class B
</TABLE>
- -----------
Returns are for Class B shares unless otherwise noted. See footnote * on page 11
for more information on performance.
Banc One in the first quarter. We sold some First USA on the merger announcement
and more throughout the second quarter--all at a handsome profit.
What else worked well?
Technology stocks also declined substantially in the fourth quarter of 1996--and
in the first quarter correction this year. Our decision to continue to hold
Computer Associates despite the market's negative view, proved to be a good
decision. The stock was the Fund's best performer in the second quarter. Once
again, it was a matter of maintaining the Fund's position through difficult
times.
What types of securities did you buy during the reporting period?
A wide variety. We don't select securities based on how the economy is doing or
what industries are hot. In keeping with the Fund's management style, we
concentrate on reviewing individual issues and try to identify those that may
offer rapid sales growth, earnings acceleration, and a catalyst or stimulus for
further growth potential.
During the first half of 1997, we added a number of names to the Fund which
contributed positively to performance. Eli Lilly introduced a new product to
combat osteoporosis and did very well. We also purchased Monsanto, which makes
agricultural products and is planning to spin off its less profitable
businesses. Compuware is a midsized software company we bought in the first
quarter. And Aetna (a managed health care company) and Washington Mutual (a
financial company) were names that we also bought during the first half of the
year. All of these purchases were positive contributors, though not necessarily
large holdings.
We also added to the Fund's position in Mattel, which gained positive earnings
visibility, acquired Tyco Toys, and had a rapid turnaround from earlier
difficulties. Late in the second quarter, we bought Merck, based on its size,
rapid earnings growth, and long-range potential. While the purchase did not
impact the Fund by
[GRAPHIC]
Volatility
- ----------
Fluctuations in the price of securities or markets, up or down, over a short
period of time.
Bottom-up
investing
- ---------
Security selection based on the specific fundamental merits of individual
issues. The opposite of "top-down" investing, which starts with general economic
trends, compares market sectors, and uses relative security values to narrow the
range of issues to examine.
Weighting
- ---------
The proportion of a portfolio allocated to a specific security or sector, i.e.,
a fund is said to be overweighted in a sector when that portion of the portfolio
is greater than the sector's general relationship to the market as a whole.
7
<PAGE>
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 6/30/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Industry Percentage
- ------------------------------------------------
<S> <C>
Financial Services 12.6%
Retail 9.1%
Health Care 8.7%
Drugs 8.1%
Technology 7.2%
All Other 54.3%
</TABLE>
- ----------
Actual percentages will vary over time.
the end of the first half of the year, we think it will perform well in the
future.
Did you buy anything that didn't do well?
Adaptec and Cardinal Health were two stocks we purchased that had slightly
negative results, but the overall impact on the Fund was negligible.
Which stocks had the biggest impact on performance?
On the positive side, Guidant, Medtronic, Schering-Plough, Travelers, Lucent
Technologies, and Microsoft were all major holdings that had outstanding
results. Guidant makes an apparatus used in cardiovascular surgery that has had
a tremendous reception in the surgical world. Medtronic is another holding in a
similar business that also did well. Schering-Plough had a big success with its
drug, Claritin, particularly when Seldane, a competitor's product, was taken off
the market. Travelers benefited from positive valuations resulting from
acquisitions in the financial sector, and Lucent Technologies profited from its
reputation and diversified offerings in telephone infrastructure. Microsoft
continued to set the pace in the technology sector and had a strong, positive
impact on the Fund.
Which stocks did poorly?
One stock that performed well in 1996 but was the Fund's worst performer in the
first half of 1997 was 3Com. However, we believe the fundamentals are still in
place and the stock rebounded significantly in the second quarter. 3Com suffered
when Intel entered the adapter card market. But we believe investors have
overestimated the Intel threat and that 3Com is still a strong contender. We
also had some problems with Abacan Resources, a Canada-based Nigerian oil
drilling company the Fund had held for some time. The stock declined
substantially when new drilling was unproductive and the company found itself
short of capital. Although the capital problem has been resolved, we've sold
some of the Fund's position and are keeping a close watch on the stock.
[GRAPHIC]
8
<PAGE>
Nine West had been a successful holding, but came under investigation by the SEC
for accounting practices relating to an acquisition in 1995. The unfavorable
press caused the stock to decline which negatively impacted the Fund. Other
acquisition-related problems plagued IKON Office Solutions, which was formerly
known as Alco Standard. Seagate, a major hard disk manufacturer, saw its stock
drop substantially when tighter competition and weakening demand led the company
to preannounce lower earnings.
Did you face any major surprises during the period?
Green Tree Financial, one of the Fund's largest holdings, lost 7%(S) over the
first half of the year. This was not due to any wrong-doing by the company, but
rather because of rumors about competition from Fannie Mae, as well as media
attention regarding the chief executive's compensation.
Another surprise was HFS. The stock declined 3%--largely due to the market's
inability to understand what we believe will be a very positive merger with CUC
International, which we also own. HFS is a provider of real estate and travel
services and controls major franchise brands such as Howard Johnson, Ramada,
Days Inn, Avis, Century 21, and Coldwell Banker. CUC International helps people
benefit from buying clubs for shopping, travel, and auto services. While the
combined company is strong, the market has yet to grasp its potential.
The biggest surprise was that two of the Fund's largest holdings, Green Tree and
HFS, lost money in a period when the market was up substantially. Since the
fundamentals of both companies remain strong, we're continuing to hold them and
have a positive outlook for the future.
How is the Fund currently weighted?
The Fund is heavily overweighted in the health care sector, with about twice the
weighting of the S&P 500. The Fund also owns a lot of technology issues, as most
growth portfolios do, but unlike most growth funds, the MainStay Capital
Appreciation Fund is also heavily concentrated in financials.
With the increased volatility in the marketplace, how are you managing risk?
We've seen two important risk factors in the first half of the year--interest
rates and corporate earnings. On both counts, we seek to manage risk by adhering
to our fundamental investment disciplines. Regardless of where interest rates
may move, we want to include companies in the Fund's investment portfolio that
we believe have significant earnings acceleration and growth potential. Of
course, there may always be earnings surprises, but by carefully researching
stocks and assessing the relationship between price, earnings, and performance
potential, we believe we're able to make prudent investment decisions. When we
believe that fundamentals are strong, we tend to hold. When we see fundamentals
deteriorating, we're likely to sell.
Can you give an example?
Sure. We sold AutoZone in the first quarter because of increased competition and
the do-it-yourself auto repair market was slowing. Since we wouldn't have bought
[GRAPHIC]
- ----------
(S) Returns reflect performance during the period securities were held in the
Fund.
9
<PAGE>
the stock with those fundamentals, we decided to sell it. Another example was
Lone Star, a chain of steak-house restaurants, which we sold in the first and
second quarters when their sales momentum slowed and the restaurant group went
out of favor. We sold both stocks at a loss to the Fund, but used the proceeds
to buy stocks that we felt had better fundamentals and offered greater growth
opportunities.
What is your outlook for the future?
We're basically optimistic. As long as interest rates are stable, economic
growth is modest, and inflation remains in check, corporate earnings are likely
to remain strong. In the meantime, we'll continue to evaluate companies
individually to seek long-term growth of capital, with dividend income as an
incidental consideration.
Edmund Spelman
Rudy Carryl
Portfolio Managers
PORTFOLIO COMPOSITION AS OF 6/30/97
<TABLE>
<CAPTION>
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Percentage
- --------------------------------------------------------------------------------
<S> <C>
Common Stocks 98.7%
Cash, Equivalents & Other Assets, less Liabilities 1.3%
</TABLE>
- ----------
Actual percentages will vary over time.
[GRAPHIC]
10
<PAGE>
Returns & Lipper Rankings as of 6/30/97
<TABLE>
<CAPTION>
Fund average annual total returns*
- ------------------------------------------------------------------------------------
Life of Fund
1 year 5 years 10 years through 6/30/97
<S> <C> <C> <C> <C>
Class A 22.69% 20.88% 14.83% 15.22%
Class B 22.08% 20.58% 14.69% 15.10%
- ------------------------------------------------------------------------------------
<CAPTION>
Fund SEC returns*
- ------------------------------------------------------------------------------------
Life of Fund
1 year 5 years 10 years through 6/30/97
<S> <C> <C> <C> <C>
Class A 15.95% 19.52% 14.19% 14.64%
Class B 17.08% 20.39% 14.69% 15.10%
- ------------------------------------------------------------------------------------
<CAPTION>
Fund Lipper+ rankings & Lipper category returns as of 6/30/97
- ------------------------------------------------------------------------------------
Life of Fund
1 year 5 years 10 years through 6/30/97
<S> <C> <C> <C> <C>
Class A 67 out of n/a n/a n/a
(cap app category) 203 funds
Class B 71 out of 12 out of 9 out of 6 out of
(cap app category) 203 funds 77 funds 58 funds 46 funds
Average Lipper
capital appreciation
fund 14.44% 15.94% 11.24% 11.17%
Average Lipper
growth fund 23.96% 16.90% 12.73% 13.14%
- ------------------------------------------------------------------------------------
<CAPTION>
Fund per share net asset values & distributions for the six months ended 6/30/97
- ------------------------------------------------------------------------------------
NAV 6/30/97 Income Capital Gains
<S> <C> <C> <C>
Class A $34.54 $0.0000 $0.0000
Class B $34.11 $0.0000 $0.0000
- ------------------------------------------------------------------------------------
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested.
Class A shares, first offered to the public on 1/3/95, are sold with a
maximum initial sales charge of 5.5% and an annual 12b-1 fee of .25%.
Performance figures for this class include the historical performance of
the Class B shares for periods from inception (5/1/86) up to 12/31/94.
Performance data for the two classes after this date vary based on
differences in their expense structures. Class B shares of the Fund are
sold with no initial sales charge, but are subject to a maximum CDSC of up
to 5% if shares are redeemed during the first 6 years of purchase and an
annual 12b-1 fee of up to 1%.
+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales
charges. Lipper averages listed above are not class specific. Life of Fund
return is from the period of the Class B shares' initial offering through
6/30/97. For the 12-month period ended 6/30/97, the Lipper growth fund
category included 761 funds. The MainStay Capital Appreciation Fund was
ranked 497 out of 761 (A shares) for the 1-year period and 512 out of 761,
45 out of 281, 38 out of 175, and 35 out of 153 (B shares) for the 1-year,
5-year, 10-year, and since-inception periods, respectively. The Fund's
Class A shares were first offered to the public on 1/3/95; Class B shares
on 5/1/86.
[GRAPHIC]
11
<PAGE>
Top 10 Equity Holdings as of 6/30/97
<TABLE>
<CAPTION>
HOLDING AMOUNT
- ----------------------------------------------------------------------------------------
<S> <C>
Tyco International Ltd. $50,564,981
Computer Associates International, Inc. 46,004,836
HFS Inc. 44,381,600
Intel Corp. 43,890,969
SunAmerica Inc. 42,900,000
Travelers Group Inc. 40,233,875
Guidant Corp. 38,258,500
Lilly (Eli) & Co. 37,931,438
American International Group, Inc. 37,052,469
Green Tree Financial Corp. 35,560,875
- ----------------------------------------------------------------------------------------
10 Largest Purchases for the six months ended 6/30/97
<CAPTION>
SECURITY AMOUNT OF PURCHASE
- ----------------------------------------------------------------------------------------
<S> <C>
Lilly (Eli) & Co. $31,502,452
Merck & Co., Inc. 26,381,779
Washington Mutual Inc. 22,952,713
Monsanto Co. 21,949,421
Tyco International Ltd. 19,135,246
Aetna Inc. 18,510,934
Compuware Corp. 17,294,843
Cardinal Health Inc. 17,129,604
Illinois Tool Works Inc. 14,885,055
USA Waste Services Inc. 13,651,206
- ----------------------------------------------------------------------------------------
10 Largest Sales for the six months ended 6/30/97
<CAPTION>
SECURITY AMOUNT OF SALE
- ----------------------------------------------------------------------------------------
<S> <C>
First USA, Inc. $32,819,530
Nike, Inc. Class B 17,530,625
Schwab (Charles) Corp. 14,451,759
Wells Fargo & Co. 12,501,100
Pharmacia & Upjohn, Inc. 12,142,175
HealthCare COMPARE Corp. 11,693,609
Genzyme Corp. 10,958,248
AutoZone, Inc. 10,155,455
Tidewater Inc. 9,533,104
Vishay Intertechnology, Inc. 9,267,187
- ----------------------------------------------------------------------------------------
</TABLE>
[GRAPHIC]
- ----------
This breakdown is provided for informational purposes only. The Fund's holdings
may change daily. All purchases and sales are aggregated by issuer. A
shareholder owns shares of the Fund but does not own a direct interest in any of
the specific securities listed. Short-term securities are excluded. See
Portfolio of Investments for specific type of security held.
12
<PAGE>
Portfolio of Investments June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
Shares Value
===========================
<S> <C> <C>
COMMON STOCKS (98.7%)+
AUTO PARTS (0.9%)
Lear Seating Corp. (a) ........................... 370,700 $ 16,449,812
-------------
BANKS (1.9%)
NationsBank Corp. ................................ 388,000 25,026,000
Wells Fargo & Co. ................................ 29,833 8,039,993
-------------
33,065,993
-------------
BIOTECHNOLOGY (1.6%)
Amgen Inc. (a) ................................... 499,000 29,004,375
-------------
BROKERAGE (0.2%)
Schwab (Charles) Corp. ........................... 102,000 4,150,125
-------------
BUILDINGS (0.7%)
Oakwood Homes Corp. .............................. 518,200 12,436,800
-------------
COMPUTER SERVICES (0.1%)
SABRE Group Holdings Inc.
Class A (a) .................................... 78,400 2,126,600
-------------
COMPUTERS & OFFICE EQUIPMENT (7.0%)
Compuware Corp. (a) .............................. 482,400 23,034,600
Danka Business Systems
PLC ADR (b) .................................... 445,700 18,217,987
Hewlett-Packard Co. .............................. 394,000 22,064,000
IKON Office Solutions, Inc. ...................... 461,800 11,516,137
Seagate Technology (a) ........................... 516,100 18,160,269
Sun Microsystems (a) ............................. 842,000 31,338,230
-------------
124,331,223
-------------
CONSUMER DURABLES (1.5%)
Harley-Davidson, Inc. ............................ 547,600 26,250,575
-------------
CONSUMER FINANCIAL SERVICES (1.6%)
First Data Corp. ................................. 657,000 28,866,938
-------------
CONSUMER SERVICES (2.2%)
CUC International Inc. (a) ....................... 696,000 17,965,500
Service Corp. International ...................... 662,000 21,763,250
-------------
39,728,750
-------------
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
<TABLE>
<CAPTION>
Shares Value
===========================
<S> <C> <C>
CREDIT & FINANCE (1.3%)
Equifax Inc. ..................................... 628,200 $ 23,361,188
-------------
DRUGS (8.1%)
Elan Corp. PLC ADR (a)(b) ........................ 567,400 25,674,850
Lilly (Eli) & Co. ................................ 347,000 37,931,438
Merck & Co., Inc. ................................ 273,900 28,348,650
Schering-Plough Corp. ............................ 724,000 34,661,500
Teva Pharmaceutical Industries
Ltd. ADR (b) ................................... 275,000 17,806,250
-------------
144,422,688
-------------
ENERGY (1.1%)
Abacan Resource Corp. (a) ........................ 1,650,000 5,259,375
Triton Energy Ltd. (a) ........................... 318,500 14,591,281
-------------
19,850,656
-------------
FINANCIAL SERVICES (12.6%)
Associates First Capital Corp.
Class A ........................................ 343,000 19,036,500
Fannie Mae ....................................... 439,000 19,151,375
Green Tree Financial Corp. ....................... 998,200 35,560,875
Household International, Inc. .................... 290,000 34,056,875
Resource Bancshares Mortgage
Group, Inc. .................................... 321,595 6,351,501
SunAmerica Inc. .................................. 880,000 42,900,000
Travelers Group Inc. ............................. 638,000 40,233,875
Washington Mutual Inc. ........................... 445,000 26,588,750
-------------
223,879,751
-------------
HEALTH CARE (8.7%)
Cardinal Health Inc. ............................. 280,000 16,030,000
Columbia/HCA Healthcare Corp. .................... 562,440 22,110,922
HEALTHSOUTH Corp. (a) ............................ 1,140,000 28,428,750
Johnson & Johnson ................................ 534,884 34,433,158
PacifiCare Health Systems, Inc. ..................
Class B (a) .................................... 135,300 8,642,287
Tenet Healthcare Corp. (a) ....................... 708,750 20,952,422
United Healthcare Corp. .......................... 448,800 23,337,600
-------------
153,935,139
-------------
INDUSTRIAL (3.8%)
Illinois Tool Works Inc. ......................... 342,400 17,098,600
Tyco International Ltd. .......................... 726,900 50,564,981
-------------
67,663,581
-------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
MainStay Capital Appreciation Fund
<TABLE>
<CAPTION>
Shares Value
===========================
<S> <C> <C>
COMMON STOCKS (Continued)
INSURANCE (4.8%)
Aetna Inc. ....................................... 174,000 $ 17,813,250
American International
Group, Inc. .................................... 248,050 37,052,469
MGIC Investment Corp. ............................ 639,200 30,641,650
-------------
85,507,369
-------------
INTERNATIONAL OIL (0.3%)
British Petroleum Co., PLC ADR (b) ............... 66,002 4,941,900
-------------
MATERIALS/PROCESSING (1.3%)
Monsanto Co. ..................................... 539,000 23,210,687
-------------
MEDICAL EQUIPMENT (5.2%)
Guidant Corp. .................................... 450,100 38,258,500
Heartport, Inc. (a) .............................. 134,000 2,361,750
Medtronic, Inc. .................................. 429,000 34,749,000
Waters Corp. (a) ................................. 484,400 17,377,850
-------------
92,747,100
-------------
OIL SERVICES (0.6%)
Tidewater Inc. ................................... 243,500 10,714,000
-------------
POLLUTION CONTROL (0.8%)
USA Waste Services Inc. (a) ...................... 381,900 14,750,888
-------------
RESTAURANTS & LODGING (3.4%)
HFS Inc. (a) ..................................... 765,200 44,381,600
Mirage Resorts Inc. (a) .......................... 666,600 16,831,650
-------------
61,213,250
-------------
RETAIL (9.1%)
Bed Bath & Beyond, Inc (a) ....................... 338,000 10,266,750
CompUSA Inc. (a) ................................. 176,000 3,784,000
Home Depot, Inc. (The) ........................... 346,900 23,914,419
Kohl's Corp. (a) ................................. 472,600 25,018,262
Kroger Co. (a) ................................... 679,000 19,691,000
Lowe's Cos., Inc. ................................ 540,000 20,047,500
Mattel, Inc. ..................................... 400,000 13,550,000
Safeway Inc. (a) ................................. 670,300 30,917,588
Staples, Inc. (a) ................................ 608,500 14,147,625
-------------
161,337,144
-------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
===========================
<S> <C> <C>
SOFTWARE (7.0%)
Computer Associates
International, Inc. ............................ 826,125 $ 46,004,836
Microsoft Corp. (a) .............................. 264,000 33,363,000
Oracle Corp. (a) ................................. 694,000 34,960,250
Sterling Commerce, Inc. (a) ...................... 310,464 10,206,504
-------------
124,534,590
-------------
TECHNOLOGY (7.2%)
Adaptec, Inc. (a) ................................ 322,000 11,189,500
Cisco Systems, Inc. (a) .......................... 430,000 28,863,750
Intel Corp. ...................................... 309,500 43,890,969
Linear Technology Corp. .......................... 300,000 15,525,000
3Com Corp. (a) ................................... 649,900 29,245,500
-------------
128,714,719
-------------
TELECOMMUNICATION (2.0%)
Lucent Technologies Inc. ......................... 488,100 35,173,706
-------------
TELECOMMUNICATION SERVICES (1.8%)
WorldCom, Inc. (a) ............................... 991,280 31,720,960
-------------
TEXTILE & APPAREL (1.9%)
Nike, Inc. Class B ............................... 291,700 17,027,988
Nine West Group Inc. (a) ......................... 411,900 15,729,431
-------------
32,757,419
-------------
Total Common Stocks
(Cost $1,124,167,288) .......................... 1,756,847,926
-------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Portfolio of Investments (unaudited) continued
<TABLE>
<CAPTION>
Principal
Amount Value
=============================
<S> <C> <C>
SHORT-TERM INVESTMENT (1.4%)
COMMERCIAL PAPER (1.4%)
American General Finance Corp.
6.08%, due 7/1/97 .............................. $ 25,678,000 $ 25,678,000
--------------
Total Short-Term Investment
(Cost $25,678,000) ............................. 25,678,000
--------------
Total Investments
(Cost $1,149,845,288) (c) ...................... 100.1% 1,782,525,926(d)
Liabilities in Excess of Cash
and Other Assets ............................... (0.1) (2,295,180)
------------ --------------
Net Assets ....................................... 100.0% $1,780,230,746
============ ==============
</TABLE>
- ----------
(a) Non-income producing securities.
(b) ADR--American Depository Receipt.
(c) The cost stated also represents the aggregate cost for Federal income tax
purposes.
(d) At June 30, 1997, net unrealized appreciation was $632,680,638, based on
cost for Federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $644,688,611 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $12,007,973.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
Statement of Assets and Liabilities as of June 30, 1997 (unaudited)
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $1,149,845,288) .......................................... $ 1,782,525,926
Cash ......................................................................................................... 505
Receivables:
Investment securities sold ................................................................................. 25,244,299
Fund shares sold ........................................................................................... 3,711,214
Dividends and interest ..................................................................................... 516,758
---------------
Total assets .............................................................................................. 1,811,998,702
---------------
LIABILITIES:
Payables:
Investment securities purchased ............................................................................ 26,986,627
Fund shares redeemed ....................................................................................... 2,355,570
NYLIFE Distributors ........................................................................................ 1,322,945
Transfer agent ............................................................................................. 406,980
Adviser .................................................................................................... 396,213
Custodian .................................................................................................. 14,000
Trustees ................................................................................................... 9,246
Accrued expenses ............................................................................................. 276,375
---------------
Total liabilities ......................................................................................... 31,767,956
---------------
Net assets ................................................................................................... $ 1,780,230,746
===============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized:
Class A .................................................................................................... $ 49,702
Class B .................................................................................................... 471,629
Additional paid-in capital ................................................................................... 1,130,741,092
Accumulated net investment loss .............................................................................. (7,374,205)
Accumulated net realized gain on investments ................................................................. 23,661,890
Net unrealized appreciation on investments ................................................................... 632,680,638
---------------
Net assets ................................................................................................... $ 1,780,230,746
===============
CLASS A
Net assets applicable to outstanding shares .................................................................. $ 171,668,382
===============
Shares of beneficial interest outstanding .................................................................... 4,970,204
===============
Net asset value and offering price per share outstanding ..................................................... $ 34.54
Maximum sales charge (5.50% of offering price) ............................................................... 2.01
---------------
Maximum offering price per share outstanding ................................................................. $ 36.55
===============
CLASS B
Net assets applicable to outstanding shares .................................................................. $ 1,608,562,364
===============
Shares of beneficial interest outstanding .................................................................... 47,162,858
===============
Net asset value and offering price per share outstanding ..................................................... $ 34.11
===============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE>
Statement of Operations for the six months ended June 30, 1997 (unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a) ............................................. $ 3,916,624
Interest .................................................. 878,028
-------------
Total income ............................................. 4,794,652
-------------
Expenses:
Distribution--Class B ..................................... 3,475,849
Administration ............................................ 2,199,777
Advisory .................................................. 2,199,777
Service ................................................... 1,979,107
Transfer agent ............................................ 1,747,027
Shareholder communication ................................. 227,387
Recordkeeping ............................................. 93,537
Registration .............................................. 89,364
Custodian ................................................. 76,953
Professional .............................................. 49,187
Trustees .................................................. 20,087
Miscellaneous ............................................. 10,805
-------------
Total expenses ........................................... 12,168,857
-------------
Net investment loss ......................................... (7,374,205)
-------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments ............................ 30,908,566
Net change in unrealized appreciation on investments ........ 174,145,989
-------------
Net realized and unrealized gain on investments ............. 205,054,555
-------------
Net increase in net assets resulting from operations ........ $ 197,680,350
=============
</TABLE>
- ----------
(a) Dividends recorded net of foreign withholding taxes of $15,794.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six months
ended Year ended
June 30, December 31,
1997* 1996
--------------- ---------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment loss ............................................... $ (7,374,205) $ (9,072,781)
Net realized gain on investments .................................. 30,908,566 14,861,333
Net change in unrealized appreciation on investments .............. 174,145,989 192,853,116
--------------- ---------------
Net increase in net assets resulting from operations .............. 197,680,350 198,641,668
--------------- ---------------
Distributions to shareholders:
From net realized gain on investments:
Class A .......................................................... -- (1,257,189)
Class B .......................................................... -- (13,410,507)
--------------- ---------------
Total distributions to shareholders ............................ -- (14,667,696)
--------------- ---------------
Capital share transactions:
Net proceeds from sale of shares:
Class A .......................................................... 90,410,927 116,509,514
Class B .......................................................... 252,450,130 543,777,410
Net asset value of shares issued to shareholders in reinvestment of
distributions:
Class A .......................................................... -- 1,189,334
Class B .......................................................... -- 13,188,752
--------------- ---------------
342,861,057 674,665,010
Cost of shares redeemed:
Class A .......................................................... (64,659,449) (48,276,296)
Class B .......................................................... (165,187,497) (241,481,230)
--------------- ---------------
Increase in net assets derived from capital share transactions . 113,014,111 384,907,484
--------------- ---------------
Net increase in net assets ..................................... 310,694,461 568,881,456
NET ASSETS:
Beginning of period ................................................. 1,469,536,285 900,654,829
--------------- ---------------
End of period ....................................................... $ 1,780,230,746 $ 1,469,536,285
=============== ===============
Accumulated net investment loss ..................................... $ (7,374,205) --
=============== ===============
</TABLE>
- ----------
* Unaudited.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A Class B Class A Class B Class A Class B
-------- ---------- -------- ---------- ------- --------
Six months ended Year ended Year ended
June 30, 1997* December 31, 1996 December 31, 1995
------------------------ ------------------------ ----------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ...... $30.56 $30.25 $25.90 $25.77 $19.11 $19.11
-------- ---------- -------- ---------- ------- --------
Net investment
income (loss)(a) ......... (0.08) (0.15) (0.08) (0.22) 0.03 (0.08)
Net realized and
unrealized gain (loss)
on investments ........... 4.06 4.01 5.05 5.01 6.81 6.79
-------- ---------- -------- ---------- ------- --------
Total from investment
operations ............... 3.98 3.86 4.97 4.79 6.84 6.71
-------- ---------- -------- ---------- ------- --------
Less distributions:
From net realized gain
on investments .......... -- -- (0.31) (0.31) (0.05) (0.05)
-------- ---------- -------- ---------- ------- --------
Net asset value at
end of period ............ $34.54 $34.11 $30.56 $30.25 $25.90 $25.77
======== ========== ======== ========== ======= ========
Total investment
return (b) ............... 13.02% 12.76% 19.16% 18.56% 35.79% 35.11%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income (loss) ........ (0.49%)+ (0.97%)+ (0.3%) (0.8%) 0.2% (0.4%)
Expenses .............. 1.10%+ 1.58%+ 1.1% 1.6% 1.1% 1.7%
Portfolio turnover rate .... 14% 14% 16% 16% 29% 29%
Average commission
rate paid ................ $0.0582 $0.0582 $0.0599 $0.0599 (c) (c)
Net assets at end of period
(in 000's) ............... $171,668 $1,608,562 $126,958 $1,342,578 $44,434 $856,221
<CAPTION>
Class B
-------------------------------------------------------------------------------------
September 1
through Year ended August 31
December 31 -------------------------------------------------------------
1994** 1994 1993 1992
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net asset value at
beginning of period ...... $19.93 $19.47 $14.14 $15.96
--------------- --------------- --------------- ---------------
Net investment
income (loss)(a) ......... (0.03) (0.12) (0.12) (0.19)
Net realized and
unrealized gain (loss)
on investments ........... (0.65) 1.13 5.64 1.30
--------------- --------------- --------------- ---------------
Total from investment
operations ............... (0.68) 1.01 5.52 1.11
--------------- --------------- --------------- ---------------
Less distributions:
From net realized gain
on investments .......... (0.14) (0.55) (0.19) (2.93)
--------------- --------------- --------------- ---------------
Net asset value at
end of period ............ $19.11 $19.93 $19.47 $14.14
=============== =============== =============== ===============
Total investment
return (b) ............... (3.40%) 5.36% 39.25% 6.77%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income (loss) ........ (0.5%)+ (0.6%) (0.7%) (1.2%)
Expenses .............. 1.8%+ 1.8% 1.8% 2.0%
Portfolio turnover rate .... 11% 31% 73% 157%
Average commission
rate paid ................ (c) (c) (c) (c)
Net assets at end of period
(in 000's) ............... $499,133 $472,497 $279,300 $128,710
</TABLE>
- ----------
* Unaudited.
** The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and is not
annualized.
(c) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
<PAGE>
MainStay Capital Appreciation Fund
Note 1--Organization and Business:
The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business
Trust. The Trust is registered under the Investment Company Act of 1940, as
amended, (the "Act") as an open-end management investment company and is
comprised of fourteen funds. These financial statements and notes relate only to
MainStay Capital Appreciation Fund (the "Fund").
The Fund currently offers two classes of shares. Class A shares, whose
distribution commenced on January 3, 1995, are offered at net asset value per
share plus an initial sales charge. Class B shares are offered without an
initial sales charge, although a declining contingent deferred sales charge may
be imposed on redemptions made within six years of purchase. Class A shares and
Class B shares bear the same voting (except for issues that relate solely to one
class), dividend, liquidation and other rights and conditions except that the
Class B shares are subject to higher distribution fee rates. Each class of
shares bears distribution and/or service fee payments under a distribution plan
pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The Fund's investment objective is to seek long-term growth of capital.
Note 2--Significant Accounting Policies:
The following is a summary of significant accounting policies followed by the
Fund:
Valuation of Fund Shares. The net asset value per share of each class of shares
is calculated on each day the New York Stock Exchange (the "Exchange") is open
for trading as of the close of regular trading on the Exchange. The net asset
value per share of each class of shares is determined by taking the assets
attributable to a class of shares, subtracting the liabilities attributable to
that class, and dividing the result by the outstanding shares of that class.
Securities Valuation. Portfolio securities of the Fund are stated at value
determined (a) by appraising common and preferred stocks which are traded on the
New York Stock Exchange at the last sale price on that day or, if no sale
occurs, at the mean between the closing bid and asked prices, (b) by appraising
common and preferred stocks traded on other United States national securities
exchanges or foreign securities exchanges as nearly as possible in the manner
described in (a) by reference to their principal exchange, including the
National Association of Securities Dealers National Market System, (c) by
appraising over-the-counter securities quoted on the National Association of
Securities Dealers NASDAQ system (but not listed on the National Market System)
at the bid price supplied through such system, (d) by appraising
over-the-counter securities not quoted on the NASDAQ system at prices supplied
by the pricing agent or brokers selected by the Adviser, if these prices are
deemed to be representative of market values at the regular close of business of
the New York Stock Exchange. Short-term securities which mature in more than 60
days are valued at current market quotations. Short-term securities which mature
in 60 days or less are valued at amortized cost if their term to maturity at
purchase was 60 days or less, or by amortizing the difference between market
value
20
<PAGE>
Notes to Financial Statements (unaudited)
on the 61st day prior to maturity and value on maturity date if their
original term to maturity at purchase exceeded 60 days.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes withheld at the source.
Dividends and Distributions to Shareholders. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
quarterly. Income dividends and capital gain distributions are determined in
accordance with federal income tax regulations which may differ from generally
accepted accounting principles.
Security Transactions and Investment Income. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued daily.
Expenses. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when allocations of direct expenses can otherwise fairly be
made. The investment income and expenses (other than expenses incurred under the
Distribution Plan) and realized and unrealized gains and losses on investments
of the Fund are allocated to separate classes of shares based upon their
relative net asset value on the date the income is earned or expenses and
realized and unrealized gains and losses are incurred.
Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
Note 3--Fees and Related Party Policies:
Investment Advisory and Administration Fees. MacKay-Shields Financial
Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an
Investment Advisory Agreement. MacKay-Shields is a registered investment adviser
and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New
York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect
wholly-owned subsidiary of New York Life, is the Administrator for the Fund.
The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an annual
rate of the Fund's average daily net assets of 0.36% on assets
21
<PAGE>
MainStay Capital Appreciation Fund
up to $200 million, 0.325% on assets from $200 million to $500 million and 0.25%
on assets in excess of $500 million.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"). The
Fund, with respect to each class of shares, has adopted a Distribution Plan (the
"Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Class A Plan, the Distributor receives payments from the Fund at
an annual rate of 0.25% of the average daily net assets of the Fund's Class A
shares, which is an expense of the Class A shares of the Fund for distribution
or service activities as designated by the Distributor. Pursuant to the Class B
Plan, the Fund's Class B shares are subject to the payment of a monthly
distribution fee, which is an expense of the Class B shares of the Fund, at the
annual rate of 0.75% of the lesser of:
(a) the aggregate gross sales of the Fund's Class B shares since the inception
of the Fund (not including reinvestment of dividends or capital gains
distributions), less the aggregate net asset value of the Fund's Class B shares
exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or upon which such charge has been
waived; or (b) the average daily net assets of the Fund's Class B shares.
The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund. Service fee as shown on the statement of
operations represents the fees for both Class A shares and Class B shares.
The Plan provides that the distribution fee is payable to NYLIFE Distributors
regardless of the amounts actually expended by NYLIFE Distributors for
distribution of the Fund's shares and service activities.
NYLIFE Distributors anticipates that its actual distribution expenditures will
substantially exceed the distribution fee received by it during the initial
years of the operation of the Plan and that in later years its expenditures may
be less than the distribution fee.
Sales Charges. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $106,649 for the six
months ended June 30, 1997. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges on redemptions of Class B shares of
$809,777 for the six months ended June 30, 1997.
Trustees Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee
of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus
reimbursement for travel and out-of-pocket expenses. The Trust allocates this
expense in proportion to the net assets of the respective Funds.
22
<PAGE>
Notes to Financial Statements (unaudited) continued
Other. NYLIFE Distributors has received $148,900 for providing the Fund certain
transfer agency services for the period January 1, 1997, through April 30, 1997.
Effective May 1, 1997, MainStay Shareholder Services Inc. ("MSS"), an indirect
wholly owned subsidiary of New York Life Insurance Company, was appointed
Transfer, Dividend Disbursing and Shareholder Servicing Agent. MSS was paid
$34,079 for services rendered May 1, 1997, through June 30, 1997.
Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $26,073 for the six months ended
June 30, 1997.
Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the six months ended June 30, 1997 amounted to
$93,537.
Note 4--Federal Income Tax:
The Fund intends to elect, to the extent provided by the regulations, to treat
$7,247,364 of qualifying capital losses that arose during the prior fiscal year
as if they arose on January 1, 1997.
Note 5--Purchases and Sales of Securities (in 000's):
During the six months ended June 30, 1997, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $352,593 and $217,347,
respectively.
Note 6--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1997* December 31, 1996
------------------ ------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold .................................. 2,847 8,036 4,064 19,254
Shares issued in reinvestment of distributions -- -- 39 431
------- ------- ------- -------
2,847 8,036 4,103 19,685
Shares redeemed .............................. (2,032) (5,262) (1,664) (8,528)
------- ------- ------- -------
Net increase ................................. 815 2,774 2,439 11,157
======= ======= ======= =======
- ---------------------
* Unaudited.
</TABLE>
23
<PAGE>
The MainStay Funds
<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Invests primarily in common stocks You want your investments to grow
CAPITAL APPRECIATION FUND graph indicating of companies in expanding markets and are willing to accept a higher
risk/reward of with strong growth potential level of risk for higher return potential
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in a portfolio that tracks You seek a conservative way to partici-
Equity Index Fund graph indicating the makeup and returns of the pate in the growth potential of stocks+
risk/reward of S&P 500*
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Offers broad diversification into You prefer the higher return potential
International Equity Fund graph indicating international stock markets with of international equities or want to
risk/reward of an emphasis on risk control add diversification to your domestic
Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Fund [Horizontal bar Invests in convertible securities for You want income from securities that
As of 6/2/97, this Fund graph indicating a special blend of long-term growth may offer growth potential if converted
was closed to new investors. risk/reward of potential and dividend income into common stock
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Balances current income with growth You seek a combination of income and
Total Return Fund graph indicating opportunities by investing in stocks, growth potential and want to manage
risk/reward of bonds, and money market instruments risk through diversification
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks undervalued stocks with You seek to maximize total return from
Value Fund graph indicating attractive dividends and a stimulus securities which may have more poten-
risk/reward of for positive change tial than the market currently sees
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's.
+ The original investment is guaranteed provided it is held for 10 years with
all dividend and capital gain distributions reinvested. If shares are
redeemed prior to or after the one-day guarantee date, the investor loses
the benefit of the guarantee with respect to those shares.
++ Investments in foreign securities may be subject to greater risks than
domestic investments. These risks include currency fluctuations, changes in
U.S. or foreign tax or currency laws, and changes in monetary policies and
economic and political conditions in foreign countries.
(S) While individual securities owned by the Government Fund may be guaranteed
by the U.S. government and its agencies, the share price of the Fund is not
guaranteed and will fluctuate with market conditions.
|| Certain of the Fund's investments may be speculative.
# Investments in the Money Market Fund are neither insured nor guaranteed by
the U.S. government and there is no assurance that the Fund will be able to
maintain a stable net asset value of $1.00 per share; investment returns
will vary with market conditions.
** A small portion of the Fund's income may be subject to state and local
taxes and the Alternative Minimum Tax. Capital gains, if any, may also be
taxed.
24
<PAGE>
<TABLE>
<CAPTION>
INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Seeks a high level of current income You are seeking to combine high
Government Fund graph indicating consistent with safety of principal current income and safety of principal
risk/reward of primarily from U.S. government
Fund] securities(S)
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar An aggressive high-yield bond You want to maximize current income
High Yield graph indicating fund that is actively managed for and can accept the higher risk of
Corporate Bond Fund risk/reward of maximum current income|| securities with high yield potential
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current yields and You prefer the higher return potential
International Bond Fund graph indicating competitive total return from non- of international bonds or want to
risk/reward of U.S. bonds with an emphasis on add diversification to your domestic
Fund] risk control investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating stability of principal, and liquidity, competitive yields on cash you're plan-
risk/reward of with free checkwriting# ning to spend or invest in the near future
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks current income and competi- You seek to combine the return potential
Strategic Income Fund tive overall return by investing in of high-grade, high-yield,|| and inter-
a diversified portfolio of domestic national bonds and want to manage risk
and foreign debt securities++ through multimarket diversification
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are a California resident and want to
California Tax Free Fund graph indicating from both federal and California keep more of what you earn by invest-
risk/reward of income taxes consistent with ing for income that's double tax free**
Fund] preservation of capital**
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are a New York State or City resident
New York Tax Free Fund graph indicating Fund from federal, New York State, and and want to keep more of what you earn
risk/reward of New York City income taxes consis- with income that's double or triple tax
Fund] tent with preservation of capital** free**
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are in a high federal income tax
Tax Free Bond Fund graph indicating from regular federal income tax con- bracket or want to pay less of your
risk/reward of sistent with preservation of capital** investment income to the IRS
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A word about risk and reward
The "thermometers" in the tables above show how much risk the investor must
assume and the related return potential. Generally speaking, investments with
higher return potential also carry higher risks. So, the longer the indicator
bar, the higher the risk and reward potential of the Fund.
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send any money. Shares
must be offered in the investor's state of residence.
25
<PAGE>
- --------------------------------------------------------------------------------
MAINSTAY
Capital Appreciation Fund
- --------------------------------------------------------------------------------
[GRAPHIC]
Semiannual Report
June 30, 1997
Unaudited
[LOGO] MAINSTAY(R)
FUNDS
OFFICERS & TRUSTEES
Alice T. Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
[LOGO] MAINSTAY(R) FUNDS
NYLIFE Distributors Inc.
Morris Corporate Center, Building A
300 Interpace Parkway
Parsippany, New Jersey 07054
Administrator & Distributor of The MainStay Funds
http://www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly owned subsidiary of
New York Life Insurance Company.
[LOGO]NEW YORK LIFE
This report is provided for the information of shareholders of the MainStay
Capital Appreciation Fund. It may be given to others only when preceded or
accompanied by an effective MainStay Funds prospectus. This report does not
offer to sell any securities or solicit orders to buy them.
(C)1997. All rights reserved. MSSA05-08/97
[GRAPHIC]
<PAGE>
Table of Contents
Chairperson's Letter 2
MainStay Convertible Fund Highlights 4
$10,000 Invested in the MainStay
Convertible Fund versus S&P 500 and
Inflation--Class A & Class B Shares 5
Portfolio Management Discussion and Analysis 6
Year-by-Year & Six-Month Performance 7
Diversification by Industry--Top 5 8
Portfolio Composition 9
Returns & Lipper Rankings 11
Top 10 Holdings 12
10 Largest Purchases 12
10 Largest Sales 12
Portfolio of Investments 13
Unaudited Financial Statements 23
Notes to Financial Statements 27
The MainStay Funds 34
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
Chairperson's Letter
After a remarkable six-year period of expansion, the U.S. economy continued to
grow throughout the first half of 1997. For most investors, the overall impact
was positive, but there were some rough seas along the way.
As the stock market made gains early in the year, concerns about the possibility
of impending inflation brought increased price volatility. In late March, the
Federal Reserve Board moved to raise interest rates in an effort to slow
economic growth. Although this preemptive strike helped keep inflation in check,
the initial reaction from both the stock and bond markets was negative. As a
result, bond prices faltered and stocks tumbled more than 9% from their peak
before both markets began to stabilize.
As employment figures, earnings estimates, and other indicators began to suggest
that economic growth was slowing in the second quarter, the stock market not
only recovered lost ground, but soared to record highs. With higher valuations,
however, the market became increasingly volatile, reacting severely to any news
that could signal a shift in buying patterns or interest rates.
Positive performance, emerging concerns
Despite the volatility, domestic stock and bond markets closed the first half of
1997 with positive returns. While Malaysia and Singapore had negative results,
most international markets performed well. Given these results, many investors
are once again celebrating their good fortune. The underlying volatility,
however, should serve to remind us that the level of growth we've enjoyed for
more than six years is not typical market behavior.
Certainly no one can predict what will happen next, so it's important to keep
recent performance in perspective. We believe that having realistic
expectations, as well as a long-range plan and diversified investments can help
you work toward achieving your goals, wherever the markets may move.
Solid team approach
At MainStay(R), we believe our risk-averse approach can help provide reassurance
to many investors, particularly in uncertain times. Each MainStay Fund is
managed by a team of experienced professionals who employ disciplined investment
strategies to seek competitive returns with careful attention to downside risk.
Our team approach offers investors a combination of experience, insight, and
market perspective that few individuals could provide on their own. It also
helps provide important checks and balances in security selection, market
evaluation, and overall accountability.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
Our Fund managers believe that strong companies tend to get stronger in up
markets and perform better than average when the markets go down. Using
selection criteria appropriate to the individual Funds they manage, they may
look for specific catalysts that are likely to stimulate growth, enhance value,
or increase yield without taking on unnecessary risk.
Looking forward
As we move into the second half of 1997, we expect that an intensified focus on
inflation, interest rates, and corporate earnings will account for much of the
momentum driving the market. Regardless of how events unfold, you can be
confident that we will hold true to our disciplined management approach.
At MainStay, we believe that having a close relationship with your Registered
Representative is one of the best ways to keep your long-term focus in any
market environment. Therefore, we urge you to speak with your Registered
Representative regularly--whether the market happens to be up or down--so he or
she can understand your needs and help keep you on a steady course.
While we've seen positive results for the first half of the year, we remain
somewhat cautious. Whatever the future brings, we'll continue to provide the
information, service, and support you can consider when making decisions--and
the prudent management you depend on to pursue your long-range goals.
Sincerely,
/s/ Alice T. Kane
Alice T. Kane
July 1997
- --------------------------------------------------------------------------------
3
<PAGE>
MainStay Convertible Fund
MARKET HIGHLIGHTS
FOR THE 6 MONTHS ENDED 6/30/97
- --------------------------------------------------------------------------------
o The convertible market, which is driven by a combination of stocks, bonds,
and factors pertaining to convertible securities, continued to climb during
the first six months of 1997.
o The short supply of convertibles remained relatively unchanged, while
demand increased from market participants whose principal investments are
not convertible securities.
o Despite high valuations, continued demand drove convertible prices higher.
- --------------------------------------------------------------------------------
FUND HIGHLIGHTS FOR THE
6- AND 12-MONTH PERIODS ENDED 6/30/97
- --------------------------------------------------------------------------------
o One-year returns of 12.37% and 11.77% for Class A shares and Class B
shares, respectively, excluding all sales charges, as of 6/30/97.
o Few opportunities met the managers' risk/reward criteria, which led to high
cash reserves throughout much of the reporting period.
o Both share classes underperformed the average Lipper* convertible
securities fund, which returned 10.09% over the first six months of 1997.
- --------------------------------------------------------------------------------
- ----------
* See footnote + and table on page 11 for more information on Lipper
Analytical Services, Inc.
4
<PAGE>
$10,000 Invested in the MainStay
Convertible Fund versus S&P 500
and Inflation
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay
Convertible S & P
Period-end Fund 500* Inflation+
- ---------- ----------- ----------- -----------
<S> <C> <C> <C>
5/1/86 $ 9,450.00 $ 10,000.00 $ 10,000.00
12/86 $ 9,547.15 $ 10,518.00 $ 10,193.00
12/87 $ 8,728.11 $ 11,070.00 $ 10,644.00
12/88 $ 9,581.83 $ 12,903.00 $ 11,113.00
12/89 $ 10,227.70 $ 16,983.00 $ 11,629.00
12/90 $ 9,542.80 $ 16,457.00 $ 12,355.00
12/91 $ 14,168.20 $ 21,460.00 $ 12,724.00
12/92 $ 16,025.10 $ 23,093.00 $ 13,100.00
12/93 $ 19,946.00 $ 25,412.00 $ 13,459.00
12/94 $ 19,678.90 $ 25,747.00 $ 13,809.00
12/95 $ 24,345.90 $ 35,412.00 $ 14,168.00
12/96 $ 27,299.00 $ 43,536.00 $ 14,637.00
6/97 $ 29,042.00 $ 52,512.00 $ 14,738.00
</TABLE>
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay
Convertible S & P
Period-end Fund 500* Inflation+
- ---------- ----------- ----------- -----------
<S> <C> <C> <C>
5/1/86 $ 10,000.00 $ 10,000.00 $ 10,000.00
12/86 $ 10,102.80 $ 10,518.00 $ 10,193.00
12/87 $ 9,236.10 $ 11,070.00 $ 10,644.00
12/88 $ 10,139.50 $ 12,903.00 $ 11,113.00
12/89 $ 10,823.00 $ 16,983.00 $ 11,629.00
12/90 $ 10,098.20 $ 16,457.00 $ 12,355.00
12/91 $ 14,992.80 $ 21,460.00 $ 12,724.00
12/92 $ 16,957.80 $ 23,093.00 $ 13,100.00
12/93 $ 21,106.90 $ 25,412.00 $ 13,459.00
12/94 $ 20,824.20 $ 25,747.00 $ 13,809.00
12/95 $ 25,618.60 $ 35,412.00 $ 14,168.00
12/96 $ 28,537.00 $ 43,536.00 $ 14,637.00
6/97 $ 30,290.00 $ 52,512.00 $ 14,738.00
</TABLE>
- ----------
The Class A graph assumes an initial investment of $10,000 made on 5/1/86
reflecting the effect of the 5.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,450 and includes the historical
performance of the Class B shares for periods from inception (5/1/86)
through 12/31/94. The Class B graph assumes an initial investment of
$10,000 made on 5/1/86. Returns shown do not reflect the Contingent
Deferred Sales Charge (CDSC), as it would not apply for the period shown.
All results include reinvestment of distributions at net asset value and
the change in share price for the stated period. Past performance is no
guarantee of future results.
* "Standard & Poor's 500 Composite Stock Price Index" and "S&P 500" are
registered trademarks of Standard & Poor's. The S&P 500 is an unmanaged
index and is considered to be generally representative of the U.S. stock
market. Results assume the reinvestment of all income and capital gain
distributions.
+ Inflation is represented by the Consumer Price Index (CPI), which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.
[GRAPHIC]
5
<PAGE>
Portfolio Management Discussion and Analysis
In the first half of 1997, a variety of forces affected the convertible market.
From January to mid-March the market rallied. In late March and early April,
however, any gains were swiftly wiped out when the stock market declined nearly
10%. Signs of low inflation but continued strong earnings growth in the second
quarter led to a spectacular recovery, with stock prices rising to record highs.
--------
Volatility increased, with 100-point shifts in the stock market becoming
commonplace.
While the bond markets were relatively quiet, the convertible market was driven
by increasing demand and relatively stable, but short supply. The result was an
------ ------
artificial inflating of prices that we believe caused increased price volatility
and created both opportunities and upsets among convertible securities.
Convertible market psychology was nervous and bearish. Nevertheless, investors
-------
sought to remain fully invested to make the most of the stock market's nearly
straight-line gains. Shifting risk/reward characteristics were largely ignored,
as investors focused on return potential in a profit-laden period.
Given this context, how did the MainStay Convertible Fund do in the first six
months of 1997?
The MainStay Convertible Fund returned 6.38% and 6.14% for Class A shares and
Class B shares, respectively, excluding all sales charges, for the six months
ended 6/30/97. Both share classes underperformed the 10.09% return of the
average Lipper* convertible securities fund over the same period.
Why did the Fund underperform its peers?
Unlike many of the Fund's competitors, we use a strict investment process that
focuses equally on the importance of managing risk and pursuing reward. While we
seek opportunities with substantial upside potential, we also seek substantial
downside protection before we will invest in convertible securities. With the
average price of a convertible rising to 125% of face value, there is likely to
be little in the way of downside protection in the near term. While many
competitors sought to be fully invested as the market rose, that approach didn't
always fit our investment criteria for the Fund.
What were you looking for that others weren't?
We're bottom-up investors who look for underlying stocks that we believe offer
---------
low downside risk and substantial growth potential. At the same time, we look
for convertibles that will allow us to participate in what we believe to be
about 50% to 75% of the upside potential of the stock, but participate in only
30% to 50% on the downside. The higher convertibles trade over their par value,
---------
the more they tend to trade like equities. Right now, the average convertible
carries most of the downside potential of the underlying stock, which is more
than we feel comfortable accepting, especially with the market at record highs.
How does an issuer's credit rating affect your evaluations?
As part of our risk management strategy, we've maintained the Fund's overall
quali-
[GRAPHIC]
Recovery
- --------
A market recovery refers to a rise in security prices that were formerly
depressed. An economic recovery refers to a general improvement in formerly weak
fundamentals underlying a country's gross domestic product.
Supply and demand
- -----------------
In the bond market, supply is influenced by the amount of new securities issued
and the amount of bonds investors wish to sell. Demand reflects the amount of
bonds investors wish to buy, which may decrease when other markets offer greater
opportunities.
- ----------
* See footnote and table on page 11 for more information on Lipper Analytical
Services, Inc.
6
<PAGE>
YEAR-BY-YEAR & SIX-MONTH PERFORMANCE
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Total
Period-end Return %
- ----------------------------------------------
<S> <C>
12/86 1.03
12/87 -8.58
12/88 9.78
12/89 6.74
12/90 -6.70
12/91 48.47
12/92 13.11
12/93 24.47
12/94 -1.34
12/95 23.72 Class A
12/95 23.02 Class B
12/96 12.13 Class A
12/96 11.39 Class B
6/97 6.38 Class A
6/97 6.14 Class B
</TABLE>
- ----------
Returns are for Class B shares unless otherwise noted. See footnote * on page 11
for more information on performance.
ty rating at the BBB level. We prefer large-capitalization companies with highly
liquid underlying equities, particularly in volatile periods. Lower-quality
convertibles that offer higher yields generally carry higher risk. In recent
months, the economy has been very accommodating for these securities. But if
this trend were to reverse, high-risk, high-yield convertibles are likely to
dramatically underperform, and will not provide sufficient downside protection
or the liquidity that we require.
Can you give us some examples of the types of securities you would consider for
the Fund?
Samsung Electronics is a computer memory chip manufacturer that offered what we
want in a convertible. They're an investment-grade company whose convertibles
were priced to yield more than U.S. Treasuries. That gave the Fund the downside
protection we were looking for. The maturity was short, which made the risk even
lower. The convertibles offered perhaps 75% to 85% of the upside potential of
the common stock, which was down over 50% from its high point. We bought the
convertibles and sold them at a substantial profit as semiconductors came out of
their slump.
Are there other examples?
Sometimes, even with low equity sensitivity but a high-yield potential, the
downside protection of a convertible can make it attractive. The Fund's
securities issued by Bethlehem Steel were a case in point. Historically, steel
companies were out of favor and the company had a convertible that offered a
very high yield. While the securities didn't offer much upside on the common
stock, we believed there was virtually no downside to the purchase. The
convertible offered a 10% yield in addition to the opportunity to participate in
approximately 25% of the capital appreciation of the stock.
It sounds like there's a lot to consider.
That's right. We say we're bottom-up investors, but we really have a double
bottom-up approach. We have to evaluate the opportunity potential in the
convertible as well as the common stock--then choose the appropriate security in
which
[GRAPHIC]
Bullish/Bearish
- ---------------
A bull market occurs when security prices are rising, a bear market occurs when
security prices decline. A bullish attitude therefore suggests a positive
outlook, while a bearish attitude represents a negative view of the market or
the opportunities it may present.
Bottom-up investing
- -------------------
Security selection based on specific fundamental merits of individual issues.
The opposite of "top-down" investing, which starts with general economic trends,
compares market sectors, and uses relative security values to narrow the range
of issues to examine.
Par value
- ---------
The nominal face value of a security. In most cases, a bond selling at par is
worth the same dollar amount it was issued for or at which it will be redeemed
at maturity--usually $1,000 per bond.
7
<PAGE>
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 6/30/97
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Industry Percentage
- -----------------------------------------------------
<S> <C>
Computers & Office Equipment 13.4%
Retail 6.3%
Telecommunication Equipment 4.2%
Insurance 3.9%
Steel, Aluminum & Other Metals 3.4%
All Other 68.8%
</TABLE>
- ----------
Actual percentages will vary over time. This chart does not include short
positions in common stocks.
to invest. Golden Books Family Entertainment, a children's book publisher, is an
excellent example. The company's stock declined from about $12.00 to around
$8.00 and the convertibles held up very well. But having held up on the
downside, the convertibles were likely to be more volatile in reaction to stock
price movements. Concerned about this volatility we sold them and bought the
common stock at approximately $8.00. By the end of June, the common stock was
back up over $12.00. As the stock recovered, the convertibles lagged, so we
swapped back into the convertible securities. The net effect was very positive
for the Fund.
Were there other securities that did well during the first half of 1997?
Integrated Health Services was one of the Fund's best performers. The company is
a consolidator in the health care industry and a low-cost provider--which in our
opinion is exactly what America wants and needs. CUC International has a
consistent growth record, selling membership packages that offer discounts on
shopping, dining, and travel. Their convertibles were positive for the Fund,
providing low double-digit returns.
Apple South is a restaurant company that had focused on the bottom line to the
exclusion of service. When their stock plummeted, they addressed their service
problems and we were able to buy their convertibles at an attractive price and
benefit from the company's turnaround. We've taken some profits, but continue to
hold the convertibles. Home Shopping Network was another turnaround situation
that we believed offered good opportunity. The company benefited from favorable
court decisions that increased the value of its local television channels. Their
convertibles have been positive performers, particularly in the second quarter.
Unisys is a third turnaround story. As mainframes have given way to networks and
PCs, the company has moved into system integration. Their fine execution has
been positive for the company, their convertibles, and the Fund.
[GRAPHIC]
8
<PAGE>
PORTFOLIO COMPOSITION AS OF 6/30/97
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Percentage
- -------------------------------------------------------------
<S> <C>
Convertible Bonds 41.8%
Convertible Preferred Stocks 27.9%
Preferred Stocks 0.6%
Corporate Bonds 0.3%
Common Stocks 14.2%
U.S. Government 15.6%
Cash Equivalents & Other Assets,
less Liabilities -0.4%
</TABLE>
- ----------
Actual percentages will vary over time. This chart does not include short
positions in common stocks.
Don't some convertibles come with special features?
Yes they do. Sumitomo Bank International Finance convertibles are one example.
They came with a special feature that allowed us to reset parity--or the
------
conversion price--back to par if the common stock went down. That substantially
reduced the Fund's downside risk, while allowing the Fund to participate in the
stock's upside potential. While Japanese banks were out of favor, we saw the
Japanese economy improving and believed institutional investors would have to
buy bank stocks to keep up with the local index. Within the first month of
trading, the convertible bond appreciated over 15%, but equally important,
protected the shareholder's investment with the reset feature.
ICN Pharmaceuticals offered a private placement with an innovative "look back"
-----------------
feature. It allows us to look back over any five-day period and buy the stock at
the average low price over that time frame. If the stock price rises suddenly,
that could allow us to buy the stock at a discount and sell it at market for a
modest profit. The Fund has done well with this security.
Do you invest a lot in private placements?
To an extent. Private placements tend to be less liquid than public bonds, and
as we mentioned, we prefer to keep the Fund highly liquid. However, the
liquidity of the convertible is directly related to that of the common stock,
and if we are compensated by the private market, we add stock to get the best
return for the Fund's shareholders.
What difficulties did you face during the reporting period?
The biggest problem was finding securities for the Fund that met our highly
specific risk/reward criteria. The convertible market is relatively small and
we're one of the biggest convertible funds. When we sell securities, we often
have to wait to find an opportunity that we feel comfortable with, which means
we may often hold a substantial cash position.
-------------
[GRAPHIC]
Conversion parity
- -----------------
The common-stock price at which a convertible security can become exchangeable
for common stock of equal value.
Private placement
- -----------------
The sale of securities directly to an institutional investor like an insurance
company or mutual fund.
Cash position
- -------------
The portion of a portfolio held in highly liquid securities (often referred to
as "cash"), either for defensive purposes or to take advantage of investment
opportunities as they may arise.
9
<PAGE>
What effect did your cash position have in the first six months of 1997?
With the market rising quickly, holding cash in the Fund was a definite
negative. But once again, everything is relative. If we believe the available
securities are overpriced, we have to determine which is better for the Fund
within prospectus guidelines--to own something that could suddenly turn against
us or something that earns a small, but steady return. We definitely erred on
the side of caution.
Are there other defensive steps you've taken?
We've purchased some zero-coupon bonds for the Fund with puts that allow the
holder to put the security back to the company at a defined yield to maturity or
a defined yield to put. This put may shorten the effective life of the security
and having this option can reduce downside risk. The Fund owns these types of
securities from Time Warner, Hasbro, and Hollinger. They yield from 5% to 10%,
have very short maturities, and offer a free option on the company's stock if it
rises substantially.
What has been the effect of closing the Convertible Fund to new investors?
In May, the Fund's Board of Trustees decided to close the Convertible Fund to
new investors. In light of the limited market for convertible securities, we
believe the decision was positive for the Fund's existing shareholders. Since
the Fund represents about 1% of the convertible market, the decision to close
the Fund will better enable the Fund to maintain liquidity and continue to seek
appropriate investment opportunities--while reducing the need to purchase
overvalued securities with new cash flows. If the convertible market should
- ----------
expand or significant opportunities should present themselves in the future, the
Fund's Board of Trustees and management may elect to reopen the Fund to new
investors if they determine it is appropriate to do so.
What is your outlook for the future?
Looking forward, we believe that the convertible market is at full valuation,
however, we have been able to find select opportunities that meet our investment
disciplines. Whatever the markets may do, we will continue to look for
securities that offer capital appreciation potential together with current
income.
Denis Laplaige
Neil Feinberg
Thomas Wynn
Portfolio Managers
[GRAPHIC]
Overvalued/Under-valued
- -----------------------
When the price of a security is higher than its intrinsic value, the security is
said to be overvalued. When the price is lower than the intrinsic value, a
security is said to be undervalued.
Certain of the Fund's investments have speculative characteristics.
10
<PAGE>
Returns & Lipper Rankings as of 6/30/97
<TABLE>
<CAPTION>
Fund average annual total returns*
- ------------------------------------------------------------------------------------
Life of Fund
1 year 5 years 10 years through 6/30/97
<S> <C> <C> <C> <C>
Class A 12.37% 15.29% 11.28% 10.57%
Class B 11.77% 14.95% 11.12% 10.43%
- ------------------------------------------------------------------------------------
<CAPTION>
Fund SEC returns*
- ------------------------------------------------------------------------------------
Life of Fund
1 year 5 years 10 years through 6/30/97
<S> <C> <C> <C> <C>
Class A 6.19% 13.99% 10.65% 10.01%
Class B 6.77% 14.72% 11.12% 10.43%
- ------------------------------------------------------------------------------------
<CAPTION>
Fund Lipper+ rankings & Lipper category returns as of 6/30/97
- ------------------------------------------------------------------------------------
Life of Fund
1 year 5 years 10 years through 6/30/97
<S> <C> <C> <C> <C>
Class A 40 out of n/a n/a n/a
43 funds
Class B 41 out of 8 out of 3 out of 3 out of
43 funds 21 funds 12 funds 7 funds
Average Lipper
convertible
securities fund 17.68% 13.37% 10.38% 9.98%
- ------------------------------------------------------------------------------------
<CAPTION>
Fund per share net asset values & distributions for the six months ended 6/30/97
- ------------------------------------------------------------------------------------
NAV 6/30/97 Income Capital Gains
<S> <C> <C> <C>
Class A $14.39 $0.2934 $0.0000
Class B $14.39 $0.2506 $0.0000
- ------------------------------------------------------------------------------------
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested.
Class A shares, first offered to the public on 1/3/95, are sold with a
maximum initial sales charge of 5.5% and an annual 12b-1 fee of .25%.
Performance figures for this class include the historical performance of
the Class B shares for periods from inception (5/1/86) up to 12/31/94.
Performance data for the two classes after this date vary based on
differences in their expense structures. Class B shares of the Fund are
sold with no initial sales charge, but are subject to a maximum CDSC of up
to 5% if shares are redeemed during the first 6 years of purchase and an
annual 12b-1 fee of up to 1%.
+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales
charges. Lipper averages listed above are not class specific. Life of Fund
return is from the period of the Class B shares' initial offering through
6/30/97. Class A shares were first offered to the public on 1/3/95; Class B
shares on 5/1/86.
[GRAPHIC]
11
<PAGE>
Top 10 Holdings as of 6/30/97
<TABLE>
<CAPTION>
HOLDING AMOUNT
- ------------------------------------------------------------------------------------------------------
<S> <C>
Microsoft Corp., $2.196, Series A $45,022,500
Loral Space & Communications Ltd., 6.00%, Series C 20,542,500
International Paper Co., 5.25% 20,454,000
Berkshire Hathaway, Inc., 1.00%, due 12/2/01 16,458,750
Hollinger, Inc., Series U.S., (zero coupon), due 10/5/13 15,864,775
Host Marriott Finance Trust, 6.75% 15,568,375
Bethlehelm Steel Corp., 3.50% 15,275,000
Alza Corp., 5.00%, due 5/1/06 14,934,375
CUC International, Inc., 3.00%, due 2/15/02 13,722,375
MascoTech, Inc., 4.50%, due 12/31/03 13,650,000
- ------------------------------------------------------------------------------------------------------
10 Largest Purchases for the six months ended 6/30/97
<CAPTION>
SECURITY AMOUNT OF PURCHASE
- ------------------------------------------------------------------------------------------------------
<S> <C>
QUALCOMM Financial Trust, 5.75% Preferred Stock and Common Stock $37,331,875
CUC International, Inc., 3.00%, due 2/15/02 and Common Stock 31,641,470
Boston Chicken, Inc., (zero coupon), due 6/1/15, 7.75%, due 5/1/04
4.50%, due 2/1/04 and Common Stock 26,608,010
Applied Magnetics Corp. Common Stock 25,694,854
Time Warner, Inc., (zero coupon), due 12/17/12, (zero coupon), due 6/22/13
and Common Stock 24,807,864
Alza Corp., (zero coupon), due 7/14/14, 5.00%, due 5/1/06 and Common Stock 22,780,508
Microsoft Corp., $2.196, Series A Preferred Stock and Common Stock 20,665,580
International Paper Co., 5.25% Preferred Stock and Common Stock 15,371,850
STB Cayman Capital Ltd., 0.50%, due 10/1/07 15,141,683
Standard & Poor's 500 Depositary Receipts Common Stock 14,515,542
- ------------------------------------------------------------------------------------------------------
10 Largest Sales for the six months ended 6/30/97
<CAPTION>
SECURITY AMOUNT OF SALE
- ------------------------------------------------------------------------------------------------------
<S> <C>
Cooper Industries, Inc., 6.00% Preferred Stock and Common Stock $30,502,991
QUALCOMM Financial Trust, 5.75% Preferred Stock and Common Stock 27,646,684
Applied Magnetics Corp. Common Stock 22,307,988
Chubb Corp. Common Stock 21,568,246
Samsung Electronics Co., 0.25%, due 12/31/06 18,742,500
Boston Chicken, Inc., (zero coupon), due 6/1/15, 7.75%, due 5/1/04
4.50%, due 2/1/04 and Common Stock 18,484,599
CUC International, Inc., 3.00%, due 2/15/02 and Common Stock 18,308,327
Standard & Poor's 500 Depositary Receipts Common Stock 12,157,193
Tele-Communications, Inc., $2.125, Series A
Preferred Stock, Class A Common Stock and TCI Pacific Communication, Inc., 5.00%
Class A Preferred Stock 10,922,358
Comcast Corp., 1.125%, due 4/15/07 and 3.375%, due 9/9/05 10,818,906
- ------------------------------------------------------------------------------------------------------
</TABLE>
[GRAPHIC]
- ----------
This breakdown is provided for informational purposes only. The Fund's holdings
may change daily. Dollar amounts represent the aggregate value of the Fund's
long positions and do not include the value of the Fund's short positions, if
any. All purchases and sales are aggregated by issuer. A shareholder owns shares
of the Fund but does not own a direct interest in any of the specific securities
listed. Short-term securities and U.S. government and federal agency issues are
excluded. See Portfolio of Investments for specific type of security held.
12
<PAGE>
Portfolio of Investments June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
Principal
Amount Value
===========================
<S> <C> <C>
CONVERTIBLE SECURITIES (69.7%)+
BONDS (41.8%)
AUTO PARTS (1.5%)
MascoTech, Inc.
4.50%, due 12/15/03 ........................... $ 15,000,000 $ 13,650,000
------------
BANKS (1.4%)
Mitsubishi Bank Limited
International Finance
(Bermuda) Trust
3.00%, due 11/30/02 ........................... 4,000,000 4,370,000
STB Cayman Capital Ltd.
0.50%, due 10/1/07 (c)(x) .....................(Yen)900,000,000 8,858,035
------------
13,228,035
------------
BUILDINGS (1.0%)
U.S. Home Corp.
4.875%, due 11/1/05 (e) ....................... $ 9,450,000 8,883,000
------------
CABLE (1.3%)
Tele-Communications
International, Inc.
4.50%, due 2/15/06 ............................ 15,600,000 12,421,500
------------
CELLULAR TELEPHONE (0.2%)
United States Cellular Corp.
(zero coupon), due 6/15/15 .................... 5,600,000 1,946,000
------------
CHEMICALS (1.4%)
Indian Petrochemicals Corp.
2.50%, due 3/11/02 (c) ........................ 1,000,000 1,055,000
RPM, Inc. of Ohio
(zero coupon), due 9/30/12 (e) ................ 24,650,000 11,677,938
------------
12,732,938
------------
COMPUTERS & OFFICE EQUIPMENT (7.1%)
Apple Computer, Inc.
6.00%, due 6/1/01 ............................. 15,200,000 12,464,000
Applied Magnetics Corp.
7.00%, due 3/15/06 (c) ........................ 8,375,000 11,693,594
HMT Technology Corp.
5.75%, due 1/15/04 ............................ 2,000,000 1,705,000
InaCom Corp.
6.00%, due 6/15/06 (c) ........................ 4,500,000 6,626,250
Micron Technology, Inc.
7.00%, due 7/1/04 ............................. 1,000,000 993,750
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
<TABLE>
<CAPTION>
Principal
Amount Value
=========================
COMPUTERS & OFFICE EQUIPMENT (Continued)
<S> <C> <C>
Quantum Corp.
5.00%, due 3/1/03 (c) ........................... $ 1,200,000 $ 2,296,500
S3, Incorporated
5.75%, due 10/1/03 (c) .......................... 8,700,000 7,634,250
Safeguard Scientifics, Inc.
6.00%, due 2/1/06 (c)(e) ........................ 5,775,000 6,547,406
Unisys Corp.
8.25%, due 8/1/00 ............................... 6,074,000 6,210,665
8.25%, due 3/15/06 (e) .......................... 6,920,000 9,099,800
-----------
65,271,215
-----------
CONGLOMERATES (2.0%)
ADT Operations, Inc.
(zero coupon), due 7/6/10 (e) ................... 7,000,000 6,580,000
Laidlaw, Inc.
6.00%, due 1/15/99 .............................. 8,500,000 11,623,750
-----------
18,203,750
-----------
DRUGS (2.1%)
Alza Corp.
5.00%, due 5/1/06 ............................... 14,750,000 14,934,375
Roche Holdings, Inc.
(zero coupon), due 5/6/12 (c) ................... 11,000,000 4,785,000
-----------
19,719,375
-----------
ELECTRICAL EQUIPMENT (0.6%)
C-Cube Microsystems, Inc.
5.875%, due 11/1/05 ............................. 4,157,000 3,419,132
California Microwave, Inc.
5.25%, due 12/15/03 ............................. 2,281,000 1,847,610
-----------
5,266,742
-----------
ENERGY (1.0%)
Pennzoil Co.
4.75%, due 10/1/03 (e) .......................... 7,250,000 9,280,000
-----------
FINANCE (2.2%)
Berkshire Hathaway, Inc.
1.00%, due 12/2/01 (e) .......................... 15,750,000 16,458,750
UBS Finance Delaware, Inc.
Medium Term Note
2.00%, due 12/15/00 ............................. 4,435,000 4,290,863
-----------
20,749,613
-----------
FINANCIAL SERVICES (0.4%)
Cityscape Financial Corp.
6.00%, due 5/1/06 (c) ........................... 4,000,000 3,500,000
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
MainStay Convertible Fund
<TABLE>
<CAPTION>
Principal
Amount Value
=============================
BONDS (Continued)
<S> <C> <C>
FOOD, BEVERAGES & TOBACCO (0.8%)
Chock Full O' Nuts Corp.
7.00%, due 4/1/12 ........................ $ 1,700,000 $ 1,717,000
Grand Metropolitan, PLC
6.50%, due 1/31/00 (c) ................... 4,150,000 5,825,562
-----------
7,542,562
-----------
GAS UTILITIES (0.2%)
Consolidated Natural Gas Co.
7.25%, due 12/15/15 ...................... 2,100,000 2,270,625
-----------
HEALTH CARE (2.2%)
Integrated Health Services, Inc.
5.75%, due 1/1/01 ........................ 3,000,000 3,588,750
6.00%, due 1/1/03 ........................ 4,500,000 5,445,000
NovaCare, Inc.
5.50%, due 1/15/00 ....................... 7,500,000 7,078,125
OccuSystems, Inc.
6.00%, due 12/15/01 (c) .................. 1,000,000 1,187,500
RoTech Medical Corp.
5.25%, due 6/1/03 (c) .................... 3,000,000 2,940,000
-----------
20,239,375
-----------
INSURANCE (1.9%)
Fidelity National Financial, Inc.
(zero coupon), due 2/15/09 ............... 14,473,000 7,417,412
Fremont General Corp.
(zero coupon), due 10/12/13 .............. 3,085,000 2,321,463
Italy Province (Republic of)
5.00%, due 6/28/01 (r) ................... 7,500,000 7,575,000
-----------
17,313,875
-----------
MEDIA (2.4%)
Time Warner, Inc.
(zero coupon), due 12/17/12 .............. 32,000,000 12,320,000
(zero coupon), due 6/22/13 ............... 21,700,000 9,982,000
-----------
22,302,000
-----------
MEDICAL EQUIPMENT (0.7%)
Phoenix Shannon, PLC ADR
9.50%, due 11/1/00 (c)(f)(g)(h) .......... 2,500,000 1,000,000
Thermedics, Inc.
(zero coupon), due 6/1/03 ................ 2,000,000 1,440,000
Thermo Cardiosystems, Inc. .................
4.75%, due 5/15/04 (c) ................... 3,000,000 3,172,500
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
============================
MEDICAL EQUIPMENT (Continued)
<S> <C> <C>
Uromed Corp.
6.00%, due 10/15/03 (c) .................... $ 1,250,000 $ 675,000
-----------
6,287,500
-----------
OIL SERVICES (0.3%)
Diamond Offshore Drilling, Inc.
3.75%, due 2/15/07 ......................... 2,000,000 2,325,000
-----------
PAPER & FOREST PRODUCTS (0.1%)
Repap Enterprises, Inc.
8.50%, due 8/1/97 .......................... 2,000,000 1,200,000
-----------
POLLUTION & RELATED (0.3%)
U.S. Filter Corp.
4.50%, due 12/15/01 ........................ 1,300,000 1,272,375
WMX Technologies, Inc.
2.00%, due 1/24/05 ......................... 2,000,000 1,845,000
-----------
3,117,375
-----------
PUBLISHING (1.9%)
Hollinger, Inc.
Series U.S.
(zero coupon), due 10/5/13 (e)(p) .......... 42,590,000 15,864,775
Times Mirror Co.
(zero coupon), due 4/15/17 (c) ............. 4,000,000 1,630,000
-----------
17,494,775
-----------
RESTAURANTS & LODGING (0.7%)
Boston Chicken, Inc.
(zero coupon), due 6/1/15 .................. 14,600,000 3,212,000
4.50%, due 2/1/04 .......................... 2,750,000 2,076,250
7.75%, due 5/1/04 .......................... 1,250,000 1,121,875
-----------
6,410,125
-----------
RETAIL (4.9%)
Costco Wholesale Corp.
5.75%, due 5/15/02 ......................... 10,000,000 10,200,000
Home Depot, Inc.
3.25%, due 10/1/01 ......................... 7,500,000 8,512,500
Home Shopping Network, Inc.
5.875%, due 3/1/06 (c) ..................... 6,000,000 7,800,000
Michaels Stores, Inc.
6.75%, due 1/15/03 (e) ..................... 8,175,000 7,439,250
Pier 1 Imports, Inc.
5.75%, due 10/1/03 ......................... 2,000,000 3,105,000
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Portfolio of Investments (unaudited) continued
<TABLE>
<CAPTION>
Principal
Amount Value
=============================
BONDS (Continued)
<S> <C> <C>
RETAIL (Continued)
Saks Holdings, Inc.
5.50%, due 9/15/06 ......................... $ 9,025,000 $ 8,122,500
------------
45,179,250
------------
SPECIALIZED SERVICES (1.5%)
CUC International, Inc.
3.00%, due 2/15/02 (c) ..................... 12,900,000 13,722,375
------------
STEEL, ALUMINUM & OTHER METALS (0.5%)
Inco Ltd.
7.75%, due 3/15/16 (p) ..................... 4,200,000 4,383,750
------------
TECHNOLOGY (0.0%) (b)
Adaptec, Inc.
4.75%, due 2/1/04 (c) ...................... 500,000 492,500
------------
TELECOMMUNICATION EQUIPMENT (0.5%)
Premiere Technologies, Inc.
5.75%, due 7/1/04 (c) ...................... 4,800,000 4,992,000
------------
TELECOMMUNICATION SERVICES (0.2%)
Gilat Satellite Networks Ltd.
6.50%, due 6/3/04 (c) ...................... 1,750,000 1,771,875
Rogers Communications, Inc.
2.00%, due 11/26/05 (p) .................... 500,000 278,750
------------
2,050,625
------------
TRANSPORTATION (0.5%)
Airborne Freight Corp.
6.75%, due 8/15/01 ......................... 3,500,000 4,200,000
------------
Total Convertible Bonds
(Cost $366,359,993) ........................ 386,375,880
------------
<CAPTION>
Shares
==============
<S> <C> <C>
PREFERRED STOCKS (27.9%)
AIRLINES (0.1%)
US Airways Group, Inc.
$4.375, Series B (j1) .................... 14,600 1,281,150
---------
BANKS (1.9%)
Banc One Corp.
$3.50, Series C .......................... 22,500 2,092,500
</TABLE>
<TABLE>
<CAPTION>
Shares Value
=============================
BANKS (Continued)
<S> <C> <C>
Fuji International Finance Trust
0.25% (c)(l) .............................. 357 $ 9,743,780
National Australia Bank Ltd.
7.875% (v) ................................ 83,200 2,324,400
Union Planters Corp.
8.00%, Series E ........................... 45,800 2,931,200
-----------
17,091,880
-----------
BUILDING MATERIALS (0.3%)
Owens Corning Capital LLC
6.50% (c) ................................. 55,000 3,107,500
-----------
CABLE (0.8%)
Cablevision Systems Corp.
8.50%, Series I (e)(j2) ................... 96,700 2,622,987
Merrill Lynch & Co., Inc.
6.00% (e)(m1) ............................. 206,500 4,930,188
-----------
7,553,175
-----------
CAPITAL GOODS (0.5%)
Cooper Industries, Inc.
6.00% (e) ................................. 184,500 4,243,500
-----------
COMPUTERS & OFFICE EQUIPMENT (5.3%)
Microsoft Corp.
$2.196, Series A (e) ...................... 517,500 45,022,500
Vanstar Financing Trust
6.75% (c) ................................. 95,000 3,776,250
-----------
48,798,750
-----------
CONGLOMERATES (0.5%)
Corning Delaware L.P.
6.00% (e) ................................. 54,500 4,741,500
-----------
DOMESTIC OIL & GAS (0.4%)
Enron Corp.
6.25% 113,600 2,172,600
Snyder Oil Corp.
$1.50 (j3) ................................ 69,000 1,742,250
-----------
3,914,850
-----------
DOMESTIC OILS (1.5%)
Atlantic Richfield Co.
9.00% ..................................... 102,400 2,201,600
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
MainStay Convertible Fund
<TABLE>
<CAPTION>
Shares Value
==============================
PREFERRED STOCKS (Continued)
<S> <C> <C>
DOMESTIC OILS (Continued)
Occidental Petroleum Corp.
$3.875, Series 1993 (c) .................... 140,000 $ 8,190,000
Parker & Parsley Capital LLC
6.25% (c) .................................. 61,500 3,889,875
-----------
14,281,475
-----------
DRUGS (0.8%)
ICN Pharmaceuticals, Inc.
Series B (c)(q) ............................ 7,130 7,130,000
-----------
ELECTRICAL EQUIPMENT (0.3%)
Elsag Bailey Process Automation N.V.
5.50% ...................................... 70,000 2,913,750
-----------
FOOD, BEVERAGES & TOBACCO (0.6%)
Chiquita Brands International, Inc.
$2.875, Series A ........................... 48,500 2,285,563
$3.75, Series B ............................ 57,000 3,306,000
-----------
5,591,563
-----------
HOUSEHOLD PRODUCTS (0.6%)
AJL PEPS
$1.44 (i) .................................. 327,200 5,705,550
-----------
INSURANCE (1.2%)
Merrill Lynch & Co., Inc.
7.25% (e)(m2) .............................. 154,800 10,603,800
-----------
MEDICAL EQUIPMENT (0.3%)
McKesson Corp.
5.00% (c) .................................. 45,000 2,790,000
-----------
NATURAL GAS PIPELINES (0.2%)
MCN Financing III
8.00% ...................................... 31,000 1,685,625
-----------
PAPER & FOREST PRODUCTS (2.8%)
International Paper Co.
5.25% (e) .................................. 389,600 20,454,000
James River Corp. of Virginia
$3.50, Series L (j4) ....................... 70,000 3,780,000
9.00%, Series P (j5) ....................... 46,500 1,604,250
-----------
25,838,250
-----------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
==============================
<S> <C> <C>
POLLUTION & RELATED (0.1%)
Automatic Commission Exchangeable
Security Trust II
6.50% (u) .................................. 20,000 $ 480,000
-----------
PUBLISHING (0.4%)
SFX Broadcasting, Inc.
6.50%, Series D ............................ 58,000 3,197,250
-----------
REAL ESTATE (0.2%)
Security Capital Pacific Trust
$1.75, Series A ............................ 54,700 1,668,350
-----------
RESTAURANTS & LODGING (2.4%)
Apple South, Inc.
3.50% (c) .................................. 110,000 6,833,750
Host Marriott Finance Trust
6.75% (c) .................................. 269,000 15,568,375
-----------
22,402,125
-----------
STEEL, ALUMINUM & OTHER METALS (2.2%)
Bethlehem Steel Corp.
$3.50 (c) .................................. 376,000 15,275,000
Kaiser Aluminum Corp.
8.255% ..................................... 73,500 826,875
WHX Corp.
6.50%, Series A ............................ 115,400 4,334,712
-----------
20,436,587
-----------
TELECOMMUNICATION EQUIPMENT (3.1%)
Loral Space & Communications Ltd.
6.00%, Series C (c) ........................ 415,000 20,542,500
QUALCOMM Financial Trust
5.75% (c) .................................. 180,000 8,505,000
-----------
29,047,500
-----------
TELECOMMUNICATION SERVICES (1.0%)
AirTouch Communications, Inc.
$4.25, Series C ............................ 78,300 3,758,400
US West, Inc.
4.50%, Series D ............................ 99,400 5,001,063
-----------
8,759,463
-----------
TELEPHONE UTILITIES (0.1%)
Nortel Inversora, S.A
10.00% (o) ................................. 27,000 1,326,375
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE>
Portfolio of Investments (unaudited) continued
<TABLE>
<CAPTION>
Shares Value
==============================
<S> <C> <C>
PREFERRED STOCKS (Continued)
TRANSPORTATION (0.1%)
Arkansas Best Corp.
$2.875, Series A ......................... 24,000 $ 816,000
-----------
TRANSPORTATION--TRUCKING (0.2%)
CNF Trust I
5.00%, Series A .......................... 41,000 2,296,000
-----------
Total Preferred Stocks
(Cost $240,439,109) ...................... 257,701,968
-----------
Total Convertible Securities
(Cost $606,799,102) ...................... 644,077,848
-----------
<CAPTION>
Principal
Amount
=================
<S> <C> <C>
CORPORATE BONDS (0.3%)
BUILDINGS (0.0%) (b)
UDC Homes, Inc.
Series C
(zero coupon)
due 11/1/00 (a)(d)(g)(h) ................... $ 18,799 4,700
----------
COMPUTERS & OFFICE EQUIPMENT (0.1%)
Businessland, Inc.
5.50%, due 3/1/07 .......................... 1,965,000 1,296,900
----------
INSURANCE (0.2%)
Statesman Group, Inc.
6.25%, due 5/1/03 .......................... 1,500,000 1,552,500
----------
Total Corporate Bonds
(Cost $2,690,969) .......................... 2,854,100
----------
<CAPTION>
Shares
=================
<S> <C> <C>
COMMON STOCKS (14.2%)
AEROSPACE (0.1%)
Orbital Sciences Corp. (a) ................... 59,450 943,769
---------
AUTO MANUFACTURING (0.4%)
Ford Motor Co. ............................... 43,900 1,657,225
Navistar International Corp. (a) ............. 124,100 2,140,725
---------
3,797,950
---------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
==============================
<S> <C> <C>
AUTO PARTS (0.1%)
Mark IV Industries, Inc. ..................... 9,555 $ 229,320
MascoTech, Inc. .............................. 43,200 901,800
----------
1,131,120
----------
BANKS (0.0%) (b)
Union Planters Corp. ......................... 2,000 103,750
----------
BUILDING MATERIALS (0.1%)
Southdown, Inc. .............................. 20,000 872,500
----------
CABLE (0.4%)
Comcast Corp., Special Class A ............... 21,900 468,113
Tele-Communications, Inc.
Class A (a) ................................ 243,200 3,617,600
----------
4,085,713
----------
CAPITAL GOODS (0.5%)
Cooper Industries, Inc. ...................... 98,420 4,896,395
----------
CASINOS (0.1%)
Aztar Corp. (a) .............................. 111,500 787,469
----------
CELLULAR TELEPHONE (0.1%)
United States Cellular Corp. (a) ............. 19,400 574,725
----------
CHEMICALS (0.6%)
Agrium, Inc. ................................. 181,100 2,082,650
IMC Global, Inc. ............................. 66,900 2,341,500
Imperial Chemical Industries, PLC
ADR (f) .................................... 25,000 1,421,875
----------
5,846,025
----------
COMPUTERS & OFFICE EQUIPMENT (0.9%)
3DO Company, (The) (a) ......................... 71,000 248,500
Applied Magnetics Corp. (a) .................... 60,900 1,377,862
HMT Technology Corp. (a) ....................... 1,200 15,525
InaCom Corp. (a) ............................... 77,200 2,402,850
Microsoft Corp. (a) ............................ 2,000 252,750
Quantum Corp. (a) .............................. 30,960 630,810
S3, Incorporated (a) ........................... 4,300 47,300
Sequent Computer Systems, Inc. (a) ............. 25,500 537,094
Trident Microsystems, Inc. (a) ................. 10,300 115,875
Unisys Corp. (a) ............................... 151,000 1,151,375
Vanstar Corp. (a) .............................. 3,000 42,375
Viasoft, Inc. (a) .............................. 5,000 253,750
Viewlogic Systems, Inc. (a) .................... 55,950 818,269
---------
7,894,335
---------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE>
MainStay Convertible Fund
<TABLE>
<CAPTION>
Shares Value
==============================
COMMON STOCKS (Continued)
<S> <C> <C>
CONGLOMERATES (0.1%)
Corning, Inc. ................................ 21,900 $1,218,188
----------
DOMESTIC OIL & GAS (0.1%)
Enron Oil & Gas Co. .......................... 76,300 1,382,937
----------
DOMESTIC OILS (0.2%)
Santa Fe Energy Resources, Inc. (a) .......... 105,200 1,545,125
----------
DRUGS (0.3%)
Alza Corp. (a) ............................... 35,000 1,012,812
ICN Pharmaceuticals, Inc. .................... 36,113 1,035,992
Sepracor, Inc. (a) ........................... 25,000 645,312
----------
2,694,116
----------
ELECTRIC UTILITIES (1.0%)
Long Island Lighting Co. ..................... 104,900 2,412,700
PECO Energy Co. .............................. 72,000 1,512,000
Western Resources, Inc. ...................... 60,000 1,946,250
Wisconsin Energy Corp. ....................... 127,100 3,145,725
----------
9,016,675
----------
ELECTRICAL EQUIPMENT (0.1%)
C-Cube Microsystems, Inc. (a) ................ 1,500 26,344
MagneTek, Inc. (a) ........................... 75,000 1,246,875
----------
1,273,219
----------
ENERGY (0.3%)
Abacan Resource Corp. (a) .................... 330,500 1,053,469
Seagull Energy Corp. (a) ..................... 104,200 1,823,500
Triton Energy Ltd. (a) ....................... 6,100 279,456
----------
3,156,425
----------
FINANCE (0.4%)
Everest Reinsurance Holdings, Inc. ........... 35,100 1,390,837
Standard & Poor's 500
Depositary Receipts (k) .................... 30,100 2,661,969
----------
4,052,806
----------
FINANCIAL SERVICES (0.1%)
Cityscape Financial Corp. (a) ................ 18,700 372,831
Finova Group, Inc. ........................... 10,000 765,000
----------
1,137,831
----------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
==============================
<S> <C> <C>
GAS UTILITIES (0.0%) (b)
United Gas Holdings Corp. (a)(d)(g) .......... 29,712 $ 50,510
----------
HEALTH CARE (0.5%)
Foundation Health Systems, Inc.
Class A (a) ................................ 37,500 1,136,719
Horizon/CMS Healthcare Corp. (a) ............. 57,800 1,159,612
NovaCare, Inc. (a) ........................... 5,000 69,375
Regency Health Services, Inc. (a) ............ 140,200 2,155,575
----------
4,521,281
----------
INSURANCE (0.6%)
Chubb Corp. .................................. 68,616 4,588,695
Fidelity National Financial, Inc. ............ 13,040 220,050
Fremont General Corp. ........................ 8,000 322,000
----------
5,130,745
----------
INTERNATIONAL OILS (0.1%)
Tarragon Oil & Gas Ltd. (a)(w) ............... 53,500 628,226
----------
MACHINERY (0.3%)
Ingersoll-Rand Co. ........................... 43,000 2,655,250
----------
MEDIA (0.7%)
HSN, Inc. (a) ................................ 15,255 476,719
Time Warner, Inc. ............................ 130,000 6,272,500
----------
6,749,219
----------
MEDICAL EQUIPMENT (0.0%) (b)
Isolyser Co., Inc. (a) ....................... 35,800 97,333
Uromed Corp. (a) ............................. 9,300 32,550
----------
129,883
----------
MINING (0.8%)
Barrick Gold Corp. ........................... 100,000 2,200,000
Battle Mountain Gold Co. ..................... 292,800 1,665,300
Homestake Mining Co. ......................... 197,500 2,579,844
Inco Ltd. .................................... 15,000 450,938
Stillwater Mining Co. (a) .................... 4,000 85,750
TVX Gold, Inc. (a) ........................... 25,000 132,812
----------
7,114,644
----------
OIL SERVICES (0.1%)
Marine Drilling Companies, Inc. (a) .......... 21,500 421,937
----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
<PAGE>
Portfolio of Investments (unaudited) continued
<TABLE>
<CAPTION>
Shares Value
==============================
COMMON STOCKS (Continued)
<S> <C> <C>
PUBLISHING (0.6%)
Golden Books Family
Entertainment, Inc. (a) .................... 139,500 $ 1,743,750
Hollinger International, Inc. ................ 142,000 1,588,625
New York Times Co., Class A .................. 49,700 2,509,850
-----------
5,842,225
-----------
REAL ESTATE (0.1%)
Horizon Group, Inc. .......................... 12,200 163,938
Meditrust Corp. .............................. 25,000 995,312
-----------
1,159,250
-----------
RECREATION & ENTERTAINMENT (0.2%)
Alliance Gaming Corp. (a) .................... 378,144 1,418,040
-----------
RESTAURANTS & LODGING (0.2%)
Buffets, Inc. (a) ............................ 171,000 1,442,813
-----------
RETAIL (1.4%)
Dillards, Inc., Class A ...................... 10,000 346,250
Intimate Brands, Inc. ........................ 75,000 1,575,000
Michaels Stores, Inc. (a) .................... 76,500 1,620,844
Nordstrom, Inc. .............................. 9,900 485,719
Pier 1 Imports, Inc. ......................... 5,800 153,700
Waban, Inc. (a) .............................. 264,646 8,518,308
-----------
12,699,821
-----------
SPECIALIZED SERVICES (0.0%) (b)
AccuStaff, Inc. (a) .......................... 9,000 213,188
-----------
STEEL, ALUMINUM & OTHER METALS (0.7%)
J&L Specialty Steel, Inc. .................... 42,800 513,600
Kaiser Aluminum Corp. (a) .................... 21,453 262,799
Newmont Mining Corp. ......................... 52,500 2,047,500
Reynolds Metals Co. .......................... 41,816 2,979,390
WHX Corp. (a) ................................ 40,000 305,000
-----------
6,108,289
-----------
TECHNOLOGICAL EQUIPMENT (0.6%)
Avid Technology, Inc. (a) .................... 69,700 1,838,337
DII Group, Inc. (a) .......................... 43,000 1,892,000
LTX Corp. (a) ................................ 244,900 1,591,850
-----------
5,322,187
-----------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
==============================
<S> <C> <C>
TELECOMMUNICATION EQUIPMENT (0.6%)
Bay Networks, Inc. (a) ..................... 82,500 $ 2,191,406
Harmonic Lightwaves, Inc. (a) .............. 28,600 489,775
Motorola, Inc. ............................. 30,000 2,280,000
QUALCOMM, Inc. (a) ......................... 5,000 254,375
-----------
5,215,556
-----------
TELECOMMUNICATION SERVICES (0.3%)
AirTouch Communications, Inc. (a) .......... 80,000 2,190,000
Rogers Communications, Inc.
Class B (a)(w) ........................... 108,000 677,153
-----------
2,867,153
-----------
TEXTILE & APPAREL (0.2%)
Burlington Industries, Inc. (a) ............ 97,000 1,164,000
Shaw Industries, Inc. ...................... 104,300 1,108,187
-----------
2,272,187
-----------
TRANSPORTATION--TRUCKING (0.3%)
Caliber System, Inc. ....................... 30,000 1,117,500
Yellow Corp. (a) ........................... 56,600 1,266,425
-----------
2,383,925
-----------
Total Common Stocks
(Cost $122,572,022) ...................... 130,757,402
-----------
PREFERRED STOCK (0.6%)
MINING (0.6%)
Freeport-McMoRan
Copper & Gold, Inc.
Series Silver (e)(j6)(n) ................. 330,000 6,022,500
-----------
Total Preferred Stock
(Cost $5,626,500) ........................ 6,022,500
-----------
<CAPTION>
Principal
Amount
==============
<S> <C> <C>
SHORT-TERM INVESTMENTS (15.6%)
U.S. GOVERNMENT (15.6%)
United States Treasury Notes
5.875%, due 7/31/97 ............... $ 90,500,000 90,528,055
8.50%, due 7/15/97 ................ 53,725,000 53,792,156
-------------
Total Short-Term Investments
(Cost $144,727,763) ............... 144,320,211
-------------
Total Investments
(Cost $882,416,356) (s) ........... 100.4% 928,032,061(t)
Liabilities in Excess of
Cash and Other Assets ............. (0.4) (3,980,005)
-------------- -------------
Net Assets .......................... 100.0% $ 924,052,056
============== =============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
<PAGE>
MainStay Convertible Fund
<TABLE>
<CAPTION>
Shares Value
===========================
<S> <C> <C>
SHORT POSITIONS (-17.8%)
COMMON STOCKS (-17.8%)
AEROSPACE (-0.3%)
Wyman-Gordon Co. (a) ......................... (106,300) $(2,870,100)
-----------
AIRLINES (-0.1%)
US Airways Group, Inc. (a) ................... (28,500) (997,500)
-----------
AUTO MANUFACTURING (-0.2%)
Navistar International Corp. (a) ............. (124,100) (2,140,725)
-----------
AUTO PARTS (-0.6%)
MascoTech, Inc. .............................. (248,000) (5,177,000)
-----------
BANKS (-0.5%)
Banc One Corp. ............................... (43,400) (2,102,188)
Union Planters Corp. ......................... (50,800) (2,635,250)
-----------
(4,737,438)
-----------
BUILDING MATERIALS (-0.1%)
Owens Corning ................................ (24,000) (1,035,000)
-----------
BUILDINGS (-0.3%)
U.S. Home Corp. (a) .......................... (120,900) (3,211,406)
-----------
CABLE (-0.6%)
Cablevision Systems Corp., Class A (a) ....... (11,800) (637,200)
Cox Communications, Inc., Class A (a) ........ (40,000) (960,000)
Tele-Communications, Inc.
Class A (a) ................................ (178,800) (2,659,650)
Tele-Communications
International, Inc.
Class A (a) ................................ (56,500) (872,219)
-----------
(5,129,069)
-----------
CAPITAL GOODS (-0.2%)
Cooper Industries, Inc. ...................... (30,000) (1,492,500)
-----------
CELLULAR TELEPHONE (-0.1%)
United States Cellular Corp. (a) ............. (19,400) (574,725)
-----------
CHEMICALS (-0.1%)
Lyondell Petrochemical Co. ................... (21,200) (462,425)
-----------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
==============================
<S> <C> <C>
COMPUTERS & OFFICE EQUIPMENT (-3.7%)
Apple Computer, Inc. (a) ................... (132,600) $ (1,889,550)
Applied Magnetics Corp. (a) ................ (382,800) (8,660,850)
InaCom Corp. (a) ........................... (214,400) (6,673,200)
Microsoft Corp. (a) ........................ (76,000) (9,604,500)
Quantum Corp. (a) .......................... (138,400) (2,819,900)
S3, Incorporated (a) ....................... (115,500) (1,270,500)
Safeguard Scientifics, Inc. (a) ............ (89,000) (2,831,312)
Vanstar Corp. (a) .......................... (25,000) (353,125)
Viasoft, Inc. (a) .......................... (5,000) (253,750)
------------
(34,356,687)
------------
CONGLOMERATES (-0.6%)
Corning, Inc. .............................. (98,500) (5,479,062)
------------
CONSUMER SERVICES (-0.6%)
ADT Ltd. (a) ............................... (178,300) (5,883,900)
------------
DOMESTIC OIL & GAS (-0.2%)
Enron Oil & Gas Co. ........................ (76,625) (1,388,828)
Snyder Oil Corp. ........................... (4,600) (84,525)
------------
(1,473,353)
------------
DOMESTIC OILS (-0.3%)
Occidental Petroleum Corp. ................. (78,400) (1,964,900)
Parker & Parsley Petroleum Co. ............. (24,700) (873,762)
------------
(2,838,662)
------------
DRUGS (-0.2%)
Alza Corp. (a) ............................. (27,000) (781,312)
ICN Pharmaceuticals, Inc. .................. (23,600) (677,025)
------------
(1,458,337)
------------
ELECTRICAL EQUIPMENT (-0.0%) (b)
Elsag Bailey Process
Automation N.V. (a) ...................... (25,000) (459,375)
------------
ENERGY (-0.9%)
Chevron Corp. .............................. (106,275) (7,857,708)
Triton Energy Ltd. (a) ..................... (6,100) (279,456)
------------
(8,137,164)
------------
FINANCE (-0.4%)
Everest Reinsurance Holdings, Inc. ......... (35,100) (1,390,837)
Standard and Poor's 500 Depositary
Receipts (k) ............................. (30,100) (2,661,969)
------------
(4,052,806)
------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
<PAGE>
Portfolio of Investments (unaudited) continued
<TABLE>
<CAPTION>
Shares Value
============================
COMMON STOCKS (Continued)
<S> <C> <C>
FINANCIAL SERVICES (-1.6%)
Cityscape Financial Corp. (a) .............. (78,000) $ (1,555,125)
Finova Group, Inc. ......................... (10,000) (765,000)
Salomon, Inc. .............................. (165,000) (9,178,125)
SunAmerica, Inc. ........................... (68,000) (3,315,000)
------------
(14,813,250)
------------
FOOD, BEVERAGES & TOBACCO (-0.3%)
Chiquita Brands International, Inc. ........ (37,000) (508,750)
Chock Full O' Nuts Corp. (a) ............... (8,100) (59,231)
Grand Metropolitan, PLC ADR (f) ............ (61,900) (2,425,706)
------------
(2,993,687)
------------
GAS UTILITIES (-0.0%) (b)
Consolidated Natural Gas Co. ............... (4,700) (252,919)
------------
HEALTH CARE (-0.1%)
NovaCare, Inc. (a) ......................... (10,000) (138,750)
OccuSystems, Inc. (a) ...................... (900) (26,100)
RoTech Medical Corp. (a) ................... (47,000) (942,938)
------------
(1,107,788)
------------
HOUSEHOLD PRODUCTS (-0.5%)
Amway Japan Ltd. (x) ....................... (97,400) (3,302,560)
Amway Japan Ltd. ADR (f) ................... (73,977) (1,280,727)
------------
(4,583,287)
------------
INSURANCE (-0.3%)
Fremont General Corp. ...................... (67,200) (2,704,800)
------------
MACHINERY (-0.2%)
Ingersoll-Rand Co. ......................... (26,500) (1,636,375)
------------
MEDIA (-0.4%)
HSN, Inc. (a) .............................. (15,255) (476,719)
Time Warner, Inc. .......................... (58,400) (2,817,800)
------------
(3,294,519)
------------
MEDICAL EQUIPMENT (-0.2%)
McKesson Corp. ............................. (25,000) (1,937,500)
------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
============================
<S> <C> <C>
MINING (-0.1%)
Inco Ltd. .................................. (15,000) $ (450,938)
Stillwater Mining Co. (a) .................. (4,000) (85,750)
------------
(536,688)
------------
PAPER & FOREST PRODUCTS (-0.9%)
International Paper Co. .................... (135,100) (6,560,794)
James River Corp. of Virginia .............. (50,000) (1,850,000)
------------
(8,410,794)
------------
POLLUTION & RELATED (-0.2%)
Republic Industries, Inc. (a) .............. (16,500) (400,125)
Waste Management, Inc. ..................... (50,000) (1,606,250)
------------
(2,006,375)
------------
PUBLISHING (-0.0%) (b)
Times Mirror Co., Class A .................. (5,000) (284,063)
------------
REAL ESTATE (-0.0%) (b)
Security Capital Pacific Trust ............. (19,300) (441,488)
------------
RESTAURANTS & LODGING (-0.3%)
McDonald's Corp. ........................... (65,650) (3,171,716)
------------
RETAIL (-1.5%)
Costco Companies, Inc. (a) ................. (79,103) (2,600,511)
Home Depot, Inc. ........................... (74,500) (5,135,844)
Michaels Stores, Inc. (a) .................. (111,400) (2,360,287)
Pier 1 Imports, Inc. ....................... (9,900) (262,350)
Saks Holdings, Inc. (a) .................... (90,000) (2,250,000)
Waban, Inc. (a) ............................ (34,800) (1,120,125)
------------
(13,729,117)
------------
SPECIALIZED SERVICES (-0.1%)
CUC International, Inc. (a) ................ (54,000) (1,393,875)
------------
TECHNOLOGICAL EQUIPMENT (-0.1%)
Avid Technology, Inc. (a) .................. (5,000) (131,875)
DII Group, Inc. (a) ........................ (15,000) (660,000)
------------
(791,875)
------------
TELECOMMUNICATION EQUIPMENT (-0.9%)
Harmonic Lightwaves, Inc. (a) .............. (28,600) (489,775)
Motorola, Inc. ............................. (30,000) (2,280,000)
QUALCOMM, Inc. (a) ......................... (100,000) (5,087,500)
------------
(7,857,275)
------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
<PAGE>
MainStay Convertible Fund
<TABLE>
<CAPTION>
Shares Value
==============================
COMMON STOCKS (Continued)
<S> <C> <C>
TRANSPORTATION (-0.1%)
Airborne Freight Corp. ................... (12,600) $ (527,625)
-------------
Total Short Positions
(Proceeds $149,741,231) ................ $(164,442,250)
=============
</TABLE>
- ----------
(a) Non-income producing securities.
(b) Less than one tenth of a percent.
(c) May be sold to institutional investors only.
(d) Fair valued securities.
(e) Partially segregated as margin against common stock short position.
(f) ADR--American Depository Receipt.
(g) Issuer in bankruptcy.
(h) Issuer in default.
(i) PEPS--Premium Exchangeable Participating Shares--each PEP is exchangeable
for 1.25 American Depository Shares of Amway Japan on 2/15/99.
(j1) Depository Shares--each share represents one-hundredth of a share of
Series B preferred stock.
(j2) Depository Shares--each share represents one-tenth of a share of Series I
convertible preferred stock.
(j3) Depository Shares--each share represents one-fourth of a share of $6.00
preferred stock.
(j4) Depository Shares--each share represents one-fourth of a share of Series L
$14.00 convertible preferred stock.
(j5) Depository Shares--each share represents one-hundredth of a share of
Series P preferred stock.
(j6) Depository Shares--each share represents 0.025 shares of a share of silver
denominated preferred stock.
(k) Each receipt represents approximately one-tenth the value of the S&P 500
Index.
(l) 357 Units--each unit reflects an interest in 1,000 Noncumulative Mandatory
Convertible preference shares of The Fuji Bank, Ltd. The preference shares
are convertible into ordinary shares at an initial conversion price of
(Yen) 2,002 per ordinary share at a future date.
(m1) STRYPES--Structured Yield Product Exchangeable for Cox Communications,
Inc. common stock.
(m2) STRYPES--Structured Yield Product Exchangeable for SunAmerica, Inc. common
stock.
(n) Dividend equals U.S. dollar equivalent of 0.04125 oz. of silver per share.
(o) MEDS--Mandatorily Exchangeable Debt Security.
(p) Yankee bonds.
(q) CIK ("Cash in Kind")--interest payment is made with cash or additional
securities.
(r) Convertible into Inamed Corp. at a conversion ratio of 2,924.7693 per
5,000 shares of Italy Province (Republic of).
(s) The cost for Federal income tax purposes is $883,198,422.
(t) At June 30, 1997, net unrealized appreciation was $44,833,639, based on
cost for Federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess
of market value over cost of $66,062,298 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $21,228,659.
(u) Convertible into Republic Industries, Inc.
(v) Exchangeable Capital Units--each unit consists of (a) US $25 principal
amount of 7 1/8% Perpetual Capital Securities and (b) a Purchase Contract
that enables the holders to make Optional Unit Exchanges (option to
exchange all or any part of its Capital Units at any time for ordinary
shares of the Bank at the rate of 1.6365 Bank ordinary shares per Capital
Units, or at the Banks option, the cash equivalent of such shares).
(w) Canadian securities.
(x) Japanese securities.
(Yen) Security denominated in Japanese Yen.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
22
<PAGE>
Statement of Assets and Liabilities as of June 30, 1997 (unaudited)
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $882,416,356) .............................................. $ 928,032,061
Cash ........................................................................................................... 218,422
Deposit with broker for securities sold short .................................................................. 149,741,231
Receivables:
Dividends and interest ....................................................................................... 18,248,335
Investment securities sold ................................................................................... 14,078,529
Fund shares sold ............................................................................................. 636,772
---------------
Total assets ................................................................................................ 1,110,955,350
---------------
LIABILITIES:
Securities sold short (proceeds $149,741,231) .................................................................. 164,442,250
Payables:
Investment securities purchased .............................................................................. 10,699,942
Fund shares redeemed ......................................................................................... 1,155,223
NYLIFE Distributors .......................................................................................... 902,679
Adviser ...................................................................................................... 274,677
Transfer agent ............................................................................................... 162,417
Dividends on securities sold short ........................................................................... 144,958
Custodian .................................................................................................... 5,953
Trustees ..................................................................................................... 5,202
Accrued expenses ............................................................................................... 178,226
Dividend payable ............................................................................................... 8,665,154
Unrealized depreciation on forward foreign currency contracts .................................................. 266,613
---------------
Total liabilities ........................................................................................... 186,903,294
---------------
Net assets ..................................................................................................... $ 924,052,056
===============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized
Class A ...................................................................................................... $ 45,003
Class B ...................................................................................................... 597,255
Additional paid-in capital ..................................................................................... 864,798,750
Accumulated distribution in excess of net investment income .................................................... (343,091)
Accumulated undistributed net realized gain on investments ..................................................... 28,306,066
Net unrealized appreciation on investments ..................................................................... 45,615,705
Net unrealized depreciation on securities sold short ........................................................... (14,701,019)
Net unrealized depreciation on forward foreign currency contracts .............................................. (266,613)
---------------
Net assets ..................................................................................................... $ 924,052,056
===============
CLASS A
Net assets applicable to outstanding shares .................................................................... $ 64,772,522
===============
Shares of beneficial interest outstanding ...................................................................... 4,500,328
===============
Net asset value per share outstanding .......................................................................... $ 14.39
Maximum sales charge (5.50% of offering price) ................................................................. 0.84
---------------
Maximum offering price per share outstanding ................................................................... $ 15.23
===============
CLASS B
Net assets applicable to outstanding shares .................................................................... $ 859,279,534
===============
Shares of beneficial interest outstanding ...................................................................... 59,725,522
===============
Net asset value and offering price per share outstanding ....................................................... $ 14.39
===============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
23
<PAGE>
Statement of Operations for the six months ended June 30, 1997 (unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a) ............................................................................................. $ 7,870,968
Interest .................................................................................................. 17,291,414
------------
Total income ............................................................................................. 25,162,382
------------
Expenses:
Distribution--Class B ..................................................................................... 2,545,447
Administration ............................................................................................ 1,592,846
Advisory .................................................................................................. 1,592,846
Service ................................................................................................... 1,106,143
Transfer agent ............................................................................................ 791,449
Dividends on securities sold short ........................................................................ 739,818
Interest expense on securities sold short ................................................................. 262,973
Shareholder communication ................................................................................. 131,744
Recordkeeping ............................................................................................. 70,199
Registration .............................................................................................. 66,516
Custodian ................................................................................................. 53,350
Professional .............................................................................................. 49,230
Trustees .................................................................................................. 11,763
Miscellaneous ............................................................................................. 8,173
------------
Total expenses ........................................................................................... 9,022,497
------------
Net investment income ....................................................................................... 16,139,885
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain from:
Security transactions ..................................................................................... 18,513,310
Securities sold short ..................................................................................... 3,128,741
Foreign currency transactions ............................................................................. 380,780
------------
Net realized gain on investments and foreign currency transactions .......................................... 22,022,831
------------
Net change in unrealized appreciation (depreciation) on investments:
Security transactions ..................................................................................... 17,916,517
Securities sold short ..................................................................................... (1,529,522)
Forward foreign currency contracts ........................................................................ (678,369)
------------
Net unrealized gain on investments and foreign currencies ................................................... 15,708,626
------------
Net realized and unrealized gain on investments and foreign currency transactions ........................... 37,731,457
------------
Net increase in net assets resulting from operations ........................................................ $ 53,871,342
============
</TABLE>
- ----------
(a) Dividends recorded net of foreign withholding taxes of $3,507.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
24
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six months
ended Year ended
June 30, December 31,
1997* 1996
============= =============
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income .......................................................................... $ 16,139,885 $ 26,085,604
Net realized gain on investments ............................................................... 18,513,310 43,583,816
Net realized gain (loss) on short sale transactions ............................................ 3,128,741 (4,786,612)
Net realized gain on foreign currency transactions ............................................. 380,780 750,486
Net change in unrealized appreciation on security transactions ................................. 17,916,517 13,120,801
Net change in unrealized depreciation on securities sold short ................................. (1,529,522) (8,782,317)
Net change in unrealized appreciation (depreciation) on forward foreign currency contracts ..... (678,369) 262,408
------------- -------------
Net increase in net assets resulting from operations ........................................... 53,871,342 70,234,186
------------- -------------
Dividends and distributions to shareholders:
From net investment income:
Class A ....................................................................................... (1,301,811) (2,097,940)
Class B ....................................................................................... (14,917,557) (26,160,372)
From net realized gain on investments:
Class A ....................................................................................... -- (2,448,253)
Class B ....................................................................................... -- (34,512,908)
------------- -------------
Total dividends and distributions to shareholders ........................................... (16,219,368) (65,219,473)
------------- -------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ....................................................................................... 11,522,055 36,576,622
Class B ....................................................................................... 97,297,864 390,110,257
Net asset value of shares issued to shareholders in reinvestment of dividends and distributions:
Class A ....................................................................................... 631,180 4,131,694
Class B ....................................................................................... 6,157,189 54,652,050
------------- -------------
115,608,288 485,470,623
Cost of shares redeemed:
Class A ....................................................................................... (6,581,049) (11,095,108)
Class B ....................................................................................... (76,490,905) (79,823,414)
------------- -------------
Increase in net assets derived from capital share transactions .............................. 32,536,334 394,552,101
------------- -------------
Net increase in net assets .................................................................. 70,188,308 399,566,814
NET ASSETS:
Beginning of period .............................................................................. 853,863,748 454,296,934
------------- -------------
End of period .................................................................................... $ 924,052,056 $ 853,863,748
============= =============
Accumulated distribution in excess of net investment income ...................................... $ (343,091) $ (263,608)
============= =============
</TABLE>
- ----------
* Unaudited.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
25
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A Class B Class A Class B Class A Class B
============ ============= ============ ============= ========== ===========
Six months ended Year ended Year ended
June 30, 1997* December 31, 1996 December 31, 1995
=============================== ============================== ==========================
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ......... $13.81 $13.80 $13.45 $13.45 $11.67 $11.67
------------ ------------- ------------ ------------- ---------- -----------
Net investment income ......... 0.27 0.24 0.57 0.48 0.59 0.51
Net realized and unrealized
gain (loss) on
investments ................. 0.58 0.58 1.02 1.02 2.14 2.14
Net realized and unrealized
gain (loss) on foreign
currency transactions ....... 0.02 0.02 0.02 0.02 (0.00)(b) (0.00)(b)
------------ ------------- ------------ ------------- ---------- -----------
Total from investment
operations .................. 0.87 0.84 1.61 1.52 2.73 2.65
------------ ------------- ------------ ------------- ---------- -----------
Less dividends and
distributions:
From net investment
income ...................... (0.29) (0.25) (0.62) (0.54) (0.55) (0.47)
From net realized gain
on investments .............. -- -- (0.63) (0.63) (0.40) (0.40)
------------ ------------- ------------ ------------- ---------- -----------
Total dividends and
distributions ............... (0.29) (0.25) (1.25) (1.17) (0.95) (0.87)
------------ ------------- ------------ ------------- ---------- -----------
Net asset value at end of
period ...................... $14.39 $14.39 $13.81 $13.80 $13.45 $13.45
============ ============= ============ ============= ========== ===========
Total investment return (a) ... 6.38% 6.14% 12.13% 11.39% 23.72% 23.02%
Ratios (to average net assets)/
Supplemental Data:
Net investment
income ................... 4.23%+ 3.61%+ 4.4% 3.8% 4.9% 4.3%
Expenses ................... 1.46%+ 2.08%+ 1.5% 2.1% 1.5% 2.1%
Portfolio turnover rate ....... 123% 123% 296% 296% 243% 243%
Average commission rate
paid ........................ $0.0456 $0.0456 $0.0468 $0.0468 (c) (c)
Net assets at end of
period (in 000's) ........... $64,772 $859,280 $56,621 $797,243 $26,836 $427,461
<CAPTION>
Class B
==========================================================
September 1
through Year ended August 31
December 31 =========================================
1994** 1994 1993 1992
=========== =========== ========== ==========
<S> <C> <C> <C> <C>
Net asset value at
beginning of period ......... $12.83 $13.92 $11.46 $10.10
----------- ----------- ---------- ----------
Net investment income ......... 0.19 0.50 0.92 0.32
Net realized and unrealized
gain (loss) on
investments ................. (0.71) 0.70 2.45 1.32
Net realized and unrealized
gain (loss) on foreign
currency transactions ....... -- (0.01) -- --
----------- ----------- ---------- ----------
Total from investment
operations .................. (0.52) 1.19 3.37 1.64
----------- ----------- ---------- ----------
Less dividends and
distributions:
From net investment
income ...................... (0.21) (0.49) (0.42) (0.28)
From net realized gain
on investments .............. (0.43) (1.79) (0.49) --
----------- ----------- ---------- ----------
Total dividends and
distributions ............... (0.64) (2.28) (0.91) (0.28)
----------- ----------- ---------- ----------
Net asset value at end of
period ...................... $11.67 $12.83 $13.92 $11.46
=========== =========== ========== ==========
Total investment return (a) ... (4.09%) 8.95% 30.80% 16.43%
Ratios (to average net assets)/
Supplemental Data:
Net investment
income ................... 4.8%+ 3.5% 3.4% 2.9%
Expenses ................... 1.9%+ 1.9% 1.9% 2.3%
Portfolio turnover rate ....... 77% 269% 370% 291%
Average commission rate
paid ........................ (c) (c) (c) (c)
Net assets at end of
period (in 000's) ........... $180,304 $160,407 $58,943 $28,899
</TABLE>
- -----------
* Unaudited.
** The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is not
annualized.
(b) Less than one cent per share.
(c) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
26
<PAGE>
Notes to Financial Statements (unaudited)
Note 1--Organization and Business:
The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business
Trust. The Trust is registered under the Investment Company Act of 1940, as
amended, (the "Act") as an open-end management investment company and is
comprised of fourteen funds. These financial statements and notes relate only to
MainStay Convertible Fund (the "Fund").
The Fund currently offers two classes of shares. Class A shares, whose
distribution commenced on January 3, 1995, are offered at net asset value per
share plus an initial sales charge. Class B shares are offered without an
initial sales charge, although a declining contingent deferred sales charge may
be imposed on redemptions made within six years of purchase. Class A shares and
Class B shares bear the same voting (except for issues that relate solely to one
class), dividend, liquidation and other rights and conditions except that the
Class B shares are subject to higher distribution fee rates. Each class of
shares bears distribution and/or service fee payments under a distribution plan
pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The Fund's investment objective is to seek capital appreciation together with
current income.
Note 2--Significant Accounting Policies:
The following is a summary of significant accounting policies followed by the
Fund:
Valuation of Fund Shares. The net asset value per share of each class of shares
is calculated on each day the New York Stock Exchange (the "Exchange") is open
for trading as of the close of regular trading on the Exchange. The net asset
value per share of each class of shares is determined by taking the assets
attributable to a class of shares, subtracting the liabilities attributable to
that class, and dividing the result by the outstanding shares of that class.
Securities Valuation. Portfolio securities of the Fund are stated at value
determined (a) by appraising common and preferred stocks which are traded on the
New York Stock Exchange at the last sale price on that day or, if no sale
occurs, at the mean between the closing bid and asked prices, (b) by appraising
common and preferred stocks traded on other United States national securities
exchanges or foreign securities exchanges as nearly as possible in the manner
described in (a) by reference to their principal exchange, including the
National Association of Securities Dealers National Market System, (c) by
appraising over-the-counter securities quoted on the National Association of
Securities Dealers NASDAQ system (but not listed on the National Market System)
at the bid price supplied through such system, (d) by appraising
over-the-counter securities not quoted on the NASDAQ system at prices supplied
by the pricing agent or brokers selected by the Adviser, if these prices are
deemed to be representative of market values at the regular close of business of
the New York Stock Exchange, (e) by appraising debt securities at prices
supplied by a pricing agent selected by the Adviser, whose prices reflect
broker/dealer supplied valuations and electronic data processing techniques if
those prices are deemed by the Adviser to be representative of market values at
the regular close of business of the New York Stock Exchange, (f) by appraising
options and futures contracts at the last sale price
27
<PAGE>
MainStay Convertible Fund
on the market where such options or futures are principally traded, and (g) by
appraising all other securities and other assets, including debt securities for
which prices are supplied by a pricing agent but are not deemed by the Adviser
to be representative of market values, but excluding money market instruments
with a remaining maturity of sixty days or less and including restricted
securities and securities for which no market quotations are available, at fair
value in accordance with procedures approved by the Trustees. Short-term
securities which mature in more than 60 days are valued at current market
quotations. Short-term securities which mature in 60 days or less are valued at
amortized cost if their term to maturity at purchase was 60 days or less, or by
amortizing the difference between market value on the 61st day prior to maturity
and value at maturity date if their original term to maturity at purchase
exceeded 60 days.
Events affecting the values of certain portfolio securities that occur between
the close of trading on the principal market for such securities (foreign
markets and over-the-counter markets) and the regular close of the New York
Stock Exchange will not be reflected in the Fund's calculation of net asset
value unless the Adviser believes that the particular event would materially
affect net asset value, in which case an adjustment would be made.
Forward Currency Contracts. A forward currency contract is an agreement to buy
or sell currencies of different countries on a specified future date at a
specified rate. During the period the forward currency contract is open, changes
in the value of the contract are recognized as unrealized gains or losses by
"marking to market" such contract on a daily basis to reflect the market value
of the contract at the end of each day's trading. When the forward currency
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transaction and
the Fund's basis in the contract. The Fund enters into forward currency
contracts in order to hedge its foreign currency denominated investments,
receivables and payables against adverse movements in future foreign currency
exchange rates.
The use of forward currency contracts involves, to varying degrees, elements of
market risk in excess of the amount recognized in the statement of assets and
liabilities. The contract or notional amounts reflect the extent of the Fund's
involvement in these financial instruments. Risks arise from the possible
movements in the foreign exchange rates underlying these instruments. The
unrealized appreciation/depreciation on forward contracts reflects the Fund's
exposure at period end to credit loss in the event of a counterparty's failure
to perform its obligations.
28
<PAGE>
Notes to Financial Statements (unaudited) continued
Forward foreign currency contracts open at June 30, 1997:
<TABLE>
<CAPTION>
Value on
Contract Trade Current Unrealized
Amount Date Value Depreciation
======== ======== ======= ============
<S> <C> <C> <C> <C>
Foreign Currency Sale Contract
- ------------------------------
Japanese Yen, expiring 9/19/97 (Yen)2,435,260,000 $21,273,705 $21,536,803 $(263,098)
---------
Foreign Currency Buy Contract
- -----------------------------
Japanese Yen, expiring 9/19/97 451,900,000 4,000,000 3,996,485 (3,515)
---------
Net Depreciation $(266,613)
=========
</TABLE>
- ----------
(Yen) Japanese Yen.
Securities Sold Short. The Fund may engage in short sales as a method of hedging
declines in the value of securities owned. When the Fund enters into a short
sale, it must segregate the security sold short, or securities equivalent in
kind and amount to the securities sold, as collateral for its obligation to
deliver the security upon conclusion of the sale. A gain, limited to the price
at which the Fund sold the security short, or a loss, unlimited as to dollar
amount, will be recognized upon termination of a short sale if the market price
on the date the short position is closed out is less or greater, respectively,
than the proceeds originally received. Any such gain or loss may be offset,
completely or in part, by the change in the value of the hedged investments.
Restricted Securities. A restricted security is a security which has been
purchased through a private offering and cannot be resold to the general public
without prior registration under the Securities Act of 1933. Disposal of these
securities may involve time-consuming negotiations and expenses, and prompt sale
at an acceptable price may be difficult. The Fund may not invest more than 10%
of its net assets in illiquid securities. At June 30, 1997 the Fund held no
restricted securities.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Investment income received by a Fund from foreign sources may be subject to
foreign income taxes withheld at the source.
Dividends and Distributions to Shareholders. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
quarterly. Income dividends and capital gain distributions are determined in
accordance with Federal income tax regulations which may differ from generally
accepted accounting principles.
Security Transactions and Investment Income. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend
29
<PAGE>
MainStay Convertible Fund
income is recognized on the ex-dividend date and interest income is accrued
daily except when collection is not expected. Discounts on securities purchased
for the Fund are accreted on the constant yield method over the life of the
respective securities or, if applicable, over the period to the first call date.
Income from payment-in-kind securities is recorded daily based on the effective
interest method of accrual.
Expenses. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when allocations of direct expenses can otherwise fairly be
made. The investment income and expenses (other than expense incurred under the
Distribution Plan) and realized and unrealized gains and losses on investments
of the Fund are allocated to separate classes of shares based upon their
relative net asset value on the date the income is earned or expenses and
realized and unrealized gains and losses are incurred. Dividends on short
positions are recorded as expenses of the Fund on ex-dividend date.
Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
Note 3--Fees and Related Party Policies:
Investment Advisory and Administration Fees. MacKay-Shields Financial
Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an
Investment Advisory Agreement. MacKay-Shields is a registered investment adviser
and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New
York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect
wholly-owned subsidiary of New York Life, is the Administrator for the Fund.
The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an annual
rate of 0.36% of the average daily net assets of the Fund.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"). The
Fund, with respect to each class of shares, has adopted a Distribution Plan (the
"Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Class A Plan, the Distributor receives payments from the Fund at
an annual rate of 0.25% of the average daily net assets of the Fund's Class A
shares, which is an expense of the Class A shares of the Fund for distribution
or service activities as designated by the Distributor. Pursuant to the Class B
Plan, the Fund's Class B shares are subject to the payment of a monthly
distribution fee, which is an expense of the Class B shares of the Fund, at the
annual rate of 0.75% of the lesser of:
30
<PAGE>
Notes to Financial Statements (unaudited) continued
(a) the aggregate gross sales of the Fund's Class B shares since the inception
of the Fund (not including reinvestment of dividends or capital gains
distributions), less the aggregate net asset value of the Fund's Class B shares
exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or upon which such charge has been
waived; or (b) the average daily net assets of the Fund's Class B shares.
The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund. Service fee as shown on the statement of
operations represents the fees for both Class A shares and Class B shares.
The Plan provides that the distribution fee is payable to NYLIFE Distributors
regardless of the amounts actually expended by NYLIFE Distributors for
distribution of the Fund's shares and service activities.
NYLIFE Distributors anticipates that its actual distribution expenditures will
substantially exceed the distribution fee received by it during the initial
years of the operation of the Plan and that in later years its expenditures may
be less than the distribution fee.
Sales Charges. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $33,616 for the six
months ended June 30, 1997. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges on redemptions of Class B shares of
$744,831 for the six months ended June 30, 1997.
Trustee Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee
of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus
reimbursement for travel and out-of-pocket expenses. The Trust allocates this
expense in proportion to the net assets of the respective Funds.
Other. NYLIFE Distributors has received $66,511 for providing the Fund certain
transfer agency services for the period January 1, 1997, through April 30, 1997.
Effective May 1, 1997, MainStay Shareholder Services Inc. ("MSS"), an indirect
wholly owned subsidiary of New York Life Insurance Company, was appointed
Transfer, Dividend Disbursing and Shareholder Servicing Agent. MSS was paid
$15,268 for services rendered May 1, 1997, through June 30, 1997.
Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $15,299 for the six months ended
June 30, 1997.
31
<PAGE>
MainStay Convertible Fund
Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the six months ended June 30, 1997 amounted to
$70,199.
Note 4--Deposit with Broker:
Cash deposited with broker in the amount of $149,741,231 is partially restricted
as collateral for securities sold short.
Note 5--Purchases and Sales of Securities (in 000's):
During the six months ended June 30, 1997, purchases and sales of U.S.
Government securities were $97,595 and $96,756, respectively. Purchases and
sales of securities, other than U.S. Government securities, securities subject
to repurchase transactions and short-term securities, were $699,305 and
$764,555, respectively.
Note 6--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1997* December 31, 1996
====================== ======================
Class A Class B Class A Class B
======= ======= ======= =======
<S> <C> <C> <C> <C>
Shares sold ............................................................ 821 6,946 2,602 27,714
Shares issued in reinvestment of dividends and distributions ........... 46 449 297 3,935
------- ------- ------- -------
867 7,395 2,899 31,649
Shares redeemed ........................................................ (468) (5,451) (793) (5,658)
------- ------- ------- -------
Net increase ........................................................... 399 1,944 2,106 25,991
======= ======= ======= =======
</TABLE>
- ----------
* Unaudited.
32
<PAGE>
This page intentionally left blank
33
<PAGE>
The MainStay Funds
<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund graph indicating of companies in expanding markets and are willing to accept a higher
risk/reward of with strong growth potential level of risk for higher return potential
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in a portfolio that tracks You seek a conservative way to partici-
Equity Index Fund graph indicating the makeup and returns of the pate in the growth potential of stocks+
risk/reward of S&P 500*
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Offers broad diversification into You prefer the higher return potential
International Equity Fund graph indicating international stock markets with of international equities or want to
risk/reward of an emphasis on risk control add diversification to your domestic
Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONVERTIBLE FUND [Horizontal bar Invests in convertible securities for You want income from securities that
graph indicating a special blend of long-term growth may offer growth potential if converted
As of 6/2/97, this Fund risk/reward of potential and dividend income into common stock
was closed to new investors. Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Balances current income with growth You seek a combination of income and
Total Return Fund graph indicating opportunities by investing in stocks, growth potential and want to manage
risk/reward of bonds, and money market instruments risk through diversification
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks undervalued stocks with You seek to maximize total return from
Value Fund graph indicating attractive dividends and a stimulus securities which may have more poten-
risk/reward of for positive change tial than the market currently sees
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's.
+ The original investment is guaranteed provided it is held for 10 years with
all dividend and capital gain distributions reinvested. If shares are
redeemed prior to or after the one-day guarantee date, the investor loses
the benefit of the guarantee with respect to those shares.
++ Investments in foreign securities may be subject to greater risks than
domestic investments. These risks include currency fluctuations, changes in
U.S. or foreign tax or currency laws, and changes in monetary policies and
economic and political conditions in foreign countries.
(S) While individual securities owned by the Government Fund may be guaranteed
by the U.S. government and its agencies, the share price of the Fund is not
guaranteed and will fluctuate with market conditions.
|| Certain of the Fund's investments may be speculative.
# Investments in the Money Market Fund are neither insured nor guaranteed by
the U.S. government and there is no assurance that the Fund will be able to
maintain a stable net asset value of $1.00 per share; investment returns
will vary with market conditions.
** A small portion of the Fund's income may be subject to state and local
taxes and the Alternative Minimum Tax. Capital gains, if any, may also be
taxed.
34
<PAGE>
<TABLE>
<CAPTION>
INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Seeks a high level of current income You are seeking to combine high
Government Fund graph indicating consistent with safety of principal current income and safety of principal
risk/reward of primarily from U.S. government
Fund] securities(S)
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar An aggressive high-yield bond You want to maximize current income
High Yield graph indicating fund that is actively managed for and can accept the higher risk of
Corporate Bond Fund risk/reward of maximum current income|| securities with high yield potential
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current yields and You prefer the higher return potential
International Bond Fund graph indicating competitive total return from non- of international bonds or want to
risk/reward of U.S. bonds with an emphasis on add diversification to your domestic
Fund] risk control investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating stability of principal, and liquidity, competitive yields on cash you're plan-
risk/reward of with free checkwriting# ning to spend or invest in the near future
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks current income and competi- You seek to combine the return potential
Strategic Income Fund graph indicating tive overall return by investing in of high-grade, high-yield,|| and inter-
risk/reward of a diversified portfolio of domestic national bonds and want to manage risk
Fund] and foreign debt securities++ through multimarket diversification
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Seeks high current income exempt You are a California resident and want to
California Tax Free Fund graph indicating from both federal and California keep more of what you earn by invest-
risk/reward of income taxes consistent with ing for income that's double tax free**
Fund] preservation of capital**
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are a New York State or City resident
New York Tax Free Fund graph indicating from federal, New York State, and and want to keep more of what you earn
risk/reward of New York City income taxes consis- with income that's double or triple tax
Fund] tent with preservation of capital** free**
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are in a high federal income tax
Tax Free Bond Fund graph indicating from regular federal income tax con- bracket or want to pay less of your
risk/reward of sistent with preservation of capital** investment income to the IRS
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A word about risk and reward
The "thermometers" in the tables above show how much risk the investor must
assume and the related return potential. Generally speaking, investments with
higher return potential also carry higher risks. So, the longer the indicator
bar, the higher the risk and reward potential of the Fund.
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send any money. Shares
must be offered in the investor's state of residence.
35
<PAGE>
- --------------------------------------------------------------------------------
MAINSTAY
Convertible Fund
- --------------------------------------------------------------------------------
[GRAPHIC]
Semiannual Report
June 30, 1997
Unaudited
[LOGO] MAINSTAY(R)
FUNDS
OFFICERS & TRUSTEES
Alice T. Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
[LOGO] MAINSTAY(R) FUNDS
NYLIFE Distributors Inc.
Morris Corporate Center, Building A
300 Interpace Parkway
Parsippany, New Jersey 07054
Administrator & Distributor of The MainStay Funds
http://www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly owned subsidiary of
New York Life Insurance Company.
[LOGO] NEW YORK LIFE
This report is provided for the information of shareholders of the MainStay
Convertible Fund. It may be given to others only when preceded or accompanied by
an effective MainStay Funds prospectus. This report does not offer to sell any
securities or solicit orders to buy them.
(C)1997. All rights reserved. MSSA06-08/97
[GRAPHIC]
<PAGE>
Table of Contents
Chairperson's Letter 2
MainStay Equity Index Fund Highlights 4
$10,000 Invested in the MainStay
Equity Index Fund versus S&P 500
and Inflation 5
Portfolio Management Discussion and Analysis 6
Year-by-Year & Six-Month Performance 7
Diversification by Industry--Top 5 9
Returns & Lipper Rankings 10
Top 10 Equity Holdings 11
Portfolio of Investments 12
Unaudited Financial Statements 22
Notes to Financial Statements 26
The MainStay Funds 32
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
Chairperson's Letter
After a remarkable six-year period of expansion, the U.S. economy continued to
grow throughout the first half of 1997. For most investors, the overall impact
was positive, but there were some rough seas along the way.
As the stock market made gains early in the year, concerns about the possibility
of impending inflation brought increased price volatility. In late March, the
Federal Reserve Board moved to raise interest rates in an effort to slow
economic growth. Although this preemptive strike helped keep inflation in check,
the initial reaction from both the stock and bond markets was negative. As a
result, bond prices faltered and stocks tumbled more than 9% from their peak
before both markets began to stabilize.
As employment figures, earnings estimates, and other indicators began to suggest
that economic growth was slowing in the second quarter, the stock market not
only recovered lost ground, but soared to record highs. With higher valuations,
however, the market became increasingly volatile, reacting severely to any news
that could signal a shift in buying patterns or interest rates.
Positive performance, emerging concerns
Despite the volatility, domestic stock and bond markets closed the first half of
1997 with positive returns. While Malaysia and Singapore had negative results,
most international markets performed well. Given these results, many investors
are once again celebrating their good fortune. The underlying volatility,
however, should serve to remind us that the level of growth we've enjoyed for
more than six years is not typical market behavior.
Certainly no one can predict what will happen next, so it's important to keep
recent performance in perspective. We believe that having realistic
expectations, as well as a long-range plan and diversified investments can help
you work toward achieving your goals, wherever the markets may move.
Solid team approach
At MainStay(R), we believe our risk-averse approach can help provide reassurance
to many investors, particularly in uncertain times. Each MainStay Fund is
managed by a team of experienced professionals who employ disciplined investment
strategies to seek competitive returns with careful attention to downside risk.
Our team approach offers investors a combination of experience, insight, and
market perspective that few individuals could provide on their own. It also
helps provide important checks and balances in security selection, market
evaluation, and overall accountability.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
Our Fund managers believe that strong companies tend to get stronger in up
markets and perform better than average when the markets go down. Using
selection criteria appropriate to the individual Funds they manage, they may
look for specific catalysts that are likely to stimulate growth, enhance value,
or increase yield without taking on unnecessary risk.
Looking forward
As we move into the second half of 1997, we expect that an intensified focus on
inflation, interest rates, and corporate earnings will account for much of the
momentum driving the market. Regardless of how events unfold, you can be
confident that we will hold true to our disciplined management approach.
At MainStay, we believe that having a close relationship with your Registered
Representative is one of the best ways to keep your long-term focus in any
market environment. Therefore, we urge you to speak with your Registered
Representative regularly--whether the market happens to be up or down--so he or
she can understand your needs and help keep you on a steady course.
While we've seen positive results for the first half of the year, we remain
somewhat cautious. Whatever the future brings, we'll continue to provide the
information, service, and support you can consider when making decisions--and
the prudent management you depend on to pursue your long-range goals.
Sincerely,
/s/ Alice T. Kane
Alice T. Kane
July 1997
- --------------------------------------------------------------------------------
3
<PAGE>
MainStay Equity Index Fund Highlights
MARKET HIGHLIGHTS
FOR THE 6 MONTHS ENDED 6/30/97
- --------------------------------------------------------------------------------
o Low interest rates, low inflation, and economic growth that slowed in the
second quarter contributed to outstanding stock performance during the
first half of 1997.
o Large-capitalization issues outperformed smaller companies, causing the S&P
500* to outperform most other broad stock market indexes during the
reporting period.
o Gains of 25% or more were not uncommon among some of the best-known blue
chip stocks, and Microsoft gained more than 52% for the first half of the
year.
o The gold, oil exploration & production, and photography/imaging sectors
recorded losses for the reporting period, but each represented less than
0.5% of the S&P 500 Index.
- --------------------------------------------------------------------------------
FUND HIGHLIGHTS FOR THE
6- AND 12-MONTH PERIODS ENDED 6/30/97
- --------------------------------------------------------------------------------
o One-year total return of 33.71% for Class A shares, excluding all sales
charges, as of 6/30/97.
o Best one-year and year-to-date performance all of The MainStay Funds as of
6/30/97.
o Since the Fund invests primarily in larger-capitalization issues, it
benefited from the market's strong "bigger is better" mentality during the
reporting period.
o The MainStay Equity Index Fund closely tracked the S&P 500 Index over the
first half of the year, but lagged its average Lipper+ peer fund for the
six months ended 6/30/97.
- --------------------------------------------------------------------------------
- ----------
* See page 5 for more information on the S&P 500 Index.
+ See footnote + and table on page 10 for more information on Lipper
Analytical Services, Inc.
4
<PAGE>
$10,000 Invested in the MainStay
Equity Index Fund versus S&P 500
and Inflation
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Equity
Period-end Index Fund S&P 500* Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
12/20/90 $ 9,700.00 $10,000.00 $10,000.00
12/91 $12,430.40 $13,040.00 $10,298.00
12/92 $13,200.20 $14,032.00 $10,603.00
12/93 $14,390.90 $15,441.00 $10,893.00
12/94 $14,462.80 $15,645.00 $11,177.00
12/95 $19,656.60 $21,518.00 $11,467.00
12/96 $23,988.20 $26,454.00 $11,847.00
6/97 $28,823.00 $31,909.00 $11,929.00
</TABLE>
- ----------
This graph assumes an initial investment of $10,000 made on 12/20/90
reflecting the effect of the current maximum sales charge of 3.0%, thereby
reducing the amount of the investment to $9,700. All results include
reinvestment of distributions at net asset value and the change in share
price for the stated period. Past performance is no guarantee of future
results.
* "Standard & Poor's 500 Composite Stock Price Index" and "S&P 500" are
registered trademarks of Standard & Poor's. The S&P 500 is an unmanaged
index and is considered to be generally representative of the U.S. stock
market. Results assume the reinvestment of all income and capital gain
distributions. The MainStay Funds are neither sponsored by nor affiliated
with Standard & Poor's.
+ Inflation is represented by the Consumer Price Index (CPI), which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.
[GRAPHIC]
5
<PAGE>
Portfolio Management Discussion and Analysis
For the first six months of 1997, the S&P 500 Index* returned 20.62%, nearly
twice the historic average total return for an entire year since 1926.+ Several
------------
economic and market factors combined to provide this outstanding performance.
In the first quarter, the Federal Reserve Board moved to raise interest rates in
order to stem economic growth. While this briefly had a negative impact on
common stocks, economic growth slowed in the second quarter, easing inflation
concerns, and the stock market soared to record highs. The combination of low
interest rates, low unemployment, and strong corporate earnings has been
particularly favorable for large capitalization issues, which have greater
--------------
visibility and greater liquidity in the marketplace. Since the S&P 500 consists
of larger-capitalization issues, it benefited strongly from the market's
preference for bigger blue chip stocks during the reporting period.
---------
Given this context, how did the MainStay Equity Index Fund do for the first six
months of 1997?
For the first six months of 1997, the Fund returned 20.15%, or nearly twice what
investors might normally anticipate for an entire year since 1926. While the
Fund closely tracked the S&P 500, it underperformed the average Lipper++ S&P 500
Index objective fund, which returned 20.27% for the reporting period. On the
other hand, the Fund outperformed the Lipper general equity average, which
returned only 12.97% for the first half of 1997.
Did the stock market rise steadily throughout the reporting period?
No, there were some significant declines as well. When the Federal Reserve Board
moved to raise interest rates at the end of March, the stock market dropped
sharply through the middle of April. After this correction, however, the S&P 500
----------
showed relatively steady growth through the end of the quarter, with a few down
days at the end of the reporting period.
Why did the Fund do so well relative to the general equity average?
The S&P 500 Index is composed primarily of large-capitalization stocks, which
substantially outperformed smaller companies. Since the average equity fund
tends to contain stocks of companies of various sizes, the Equity Index Fund's
concentration among large-capitalization issues worked in its favor. In periods
when large-capitalization issues are out of favor, however, the Fund would tend
to underperform, since its holdings are determined by the makeup of the S&P 500
Index, rather than what's currently showing stronger performance.
Which stocks contributed the most to the Fund's strong performance?
The largest blue chip stocks with the highest weight in the Index and the best
------
performance had the greatest overall impact. Among these were General Electric
and Coca-Cola, with respective gains of 32.92% and 28.82%, representing 3.29%
and 2.45% of the Index, respectively. Microsoft, which represents 2.20% of the
Index, gained a spectacular 52.95% for the first half of 1997. Exxon and Merck,
with respective weights of 2.17%
[GRAPHIC]
Total return
- ------------
The performance of an investment with all income and capital gains reinvested.
Capitalization
- --------------
The amount of outstanding equity a company has issued. Companies may vary
greatly in the amount of equity capital they have raised, and their
capitalization may change with new issues or stock repurchases.
- ----------
* See page 5 for more information on the S&P 500 Index.
+ Source: Ibbotson Associates, Chicago. Used with permission. All rights
reserved. Average annual total return for 1926-1996 was 10.7%. Past
performance is no guarantee of future results.
++ See footnote and table on page 10 for more information on Lipper Analytical
Services, Inc.
6
<PAGE>
YEAR-BY-YEAR & SIX-MONTH PERFORMANCE
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Total Return
Period-end %
- -------------------------------------------
<S> <C>
12/91 28.01
12/92 6.23
12/93 9.01
12/94 0.47
12/95 35.91
12/96 22.04
6/97 20.15
</TABLE>
- ----------
See footnote * on page 10 for more information on performance.
and 1.74% in the Index, gained 27.38% and 31.80%, respectively, over the
reporting period.
Which were the best performing sectors in the first half of 1997?
Truckers, which had been the weakest performing sector in 1996, provided the
best results in both the first and second quarters of 1997, for a year-to-date
total return of 96.58%. With a weighting of only 0.02%, however, the sector,
which consists of just one stock, Caliber Systems, had little impact on the
Index.
Savings & loan stocks, which account for 0.36% of the Index, gained 45.93% for
the first half of 1997 and were among the best performing stocks in the first
quarter as well. Office equipment and supplies, with a weighting of 0.55%,
gained 39.60% for the first six months of the year.
Were there other strong sectors which contributed to the Fund's performance?
In the first quarter, hardware & tools placed among the top three performing
sectors, gaining 18.92% in just three months. In the second quarter, machines,
which represent just 0.03% of the Index, gained 39.58%. One positive contributor
to performance was Cincinnati Milacron, the industry's largest company, which
steadily gained 38.82% in the second quarter.
Communication equipment manufacturers also did well in the second quarter,
gaining 33.90% for investors and representing a healthy 2.39% of the Index. The
two largest companies in this industry, Cisco Systems and Lucent Technologies,
gained 39.48% and 36.75%, respectively, in the second quarter of 1997.
Did every sector come out ahead for the first half of the year?
No. There were a few sectors that lost money. Gold, down 17.21%, was the worst
performing industry for the first half of the year, largely as a result of
European banks selling gold reserves. Low inflation, stable interest rates, and
a strong stock market also took their toll, as did reports of fraudulent claims
of gold discoveries by small exploration companies.
[GRAPHIC]
Blue chip
- ---------
Common stock of a nationally recognized company with a long record of profit
growth and dividend payment and a reputation for quality management, products,
and services. Blue chip stocks may often have relatively high prices and
moderate dividend yields.
Correction
- ----------
A shift in security prices to bring them more in line with historically
appropriate levels.
Weighting
- ---------
The proportion of an index represented by the capitalization of an individual
company or sector. Companies or sectors with larger relative amounts of capital
will thus have greater weightings in an index in which they are represented.
7
<PAGE>
Oil exploration and production companies lost 12.13% during the first half of
the year, reflecting a mild winter and declining oil prices. Photography and
imaging companies lost 7.24% over the reporting period. In the second quarter,
Eastman Kodak's stock was flat, and IKON (formerly Alco Standard) lost 25.44%
when the company issued profit projections well below expected levels. Each of
these declining sectors accounted for less than 0.50% of the Index throughout
the reporting period.
Why did the Fund underperform the S&P 500 Index?
The returns of the S&P 500 are based on a hypothetical investment. The MainStay
Equity Index Fund, on the other hand, is a real-world investment that incurs
trading expenses and management fees the Index does not. While the Fund seeks to
track the makeup and total return of the Index, it cannot fully replicate the
performance of the Index and will usually trail it by at least a small margin.
Although the Fund also underperformed the average Lipper S&P 500 Index objective
fund, our results were within 12 basis points of the average peer fund--or just
over one tenth of one percent off the mark.
Are we likely to see equity returns continue in this range?
The MainStay Equity Index Fund seeks to track the S&P 500 Index. Investors
should bear in mind that past performance is no guarantee of future results.
While the Equity Index Fund may do well when the stock market rises, it is also
designed to track the Index when it remains flat or declines. While economic
conditions currently appear favorable for stocks, investors should keep in mind
that recent returns have been higher than historical averages since 1926.
James A. Mehling, CFA
Portfolio Manager
[GRAPHIC]
8
<PAGE>
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 6/30/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Industry Percentage
- ----------------------------------------------------
<S> <C>
Oil--Integrated International 6.3%
Major Regional Banks 4.6%
Drugs 4.4%
Health Care--Diversified 4.3%
Electrical Equipment 4.0%
All Other 76.4%
</TABLE>
- ----------
Actual percentages will vary over time.
[GRAPHIC}
9
<PAGE>
Returns & Lipper Rankings as of 6/30/97
<TABLE>
<CAPTION>
Fund average annual total returns*
- --------------------------------------------------------------------------------
1 year 5 years Life of Fund through 6/30/97
<S> <C> <C> <C>
Class A 33.71% 18.63% 18.14%
- --------------------------------------------------------------------------------
<CAPTION>
Fund SEC returns*
- --------------------------------------------------------------------------------
1 year 5 years Life of Fund through 6/30/97
<S> <C> <C> <C>
Class A 29.70% 17.91% 17.59%
- --------------------------------------------------------------------------------
<CAPTION>
Fund Lipper+ rankings & Lipper category returns as of 6/30/97
- --------------------------------------------------------------------------------
1 year 5 years Life of Fund through 6/30/97
<S> <C> <C> <C>
Equity Index 48 out of 19 out of 13 out of
Fund 59 funds 20 funds 13 funds
Average Lipper
S&P 500 Index
objective fund 34.00% 19.23% 18.98%
- --------------------------------------------------------------------------------
<CAPTION>
Fund per share net asset value & distributions for the six months ended 6/30/97
- --------------------------------------------------------------------------------
NAV 6/30/97 Income Capital Gains
<S> <C> <C> <C>
Class A $28.08 $0.0000 $0.0000
- --------------------------------------------------------------------------------
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for applicable sales charges. In compliance with
SEC guidelines, SEC returns include the maximum sales charge and show the
percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested. The administrator
and adviser have agreed to assume a portion of the expenses. The total
return for this Fund would have been lower without this voluntary
limitation. This voluntary expense limitation may be terminated or revised
at any time. The MainStay Equity Index Fund, first offered to the public on
12/20/90, is offered as Class A shares only. As of 1/3/95, shares were
subject to an initial sales charge of up to 3% and an annual 12b-1 fee of
.25%.
+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales
charges. Life of Fund return is for the period 12/20/90 through 6/30/97.
For the 12-month period ended 6/30/97, the Lipper general equity average
included 2,361 funds and the MainStay Equity Index Fund was ranked 252 out
of 2,361; 284 out of 827; and 305 out of 650 funds for the 1-year, 5-year,
and since-inception periods, respectively.
[GRAPHIC]
10
<PAGE>
Top 10 Equity Holdings as of 6/30/97
<TABLE>
<CAPTION>
HOLDING AMOUNT
- --------------------------------------------------------------------------------
<S> <C>
General Electric Co. $9,938,635
Coca-Cola Co. 8,013,926
Exxon Corp. 7,092,180
Microsoft Corp. 7,015,455
Merck & Co., Inc. 5,804,487
Intel Corp. 5,416,245
Royal Dutch Petroleum Co. 5,414,228
Philip Morris Cos. 5,006,875
Procter & Gamble Co. 4,462,229
International Business Machines Corp. 4,159,087
- --------------------------------------------------------------------------------
</TABLE>
[GRAPHIC]
- ----------
This breakdown is provided for informational purposes only. The Fund's holdings
may change daily. A shareholder owns shares of the Fund but does not own a
direct interest in any of the specific securities listed above. Short-term
securities are excluded. See Portfolio of Investments for specific type of
security held.
11
<PAGE>
MainStay Equity Index Fund
<TABLE>
<CAPTION>
Shares Value
============================
COMMON STOCKS (95.8%)+
<S> <C> <C>
AEROSPACE/DEFENSE (1.8%)
Boeing Co. ........................... 33,307 $ 1,767,353
General Dynamics Corp. ............... 2,938 220,350
Lockheed Martin Corp. ................ 9,181 950,807
McDonnell Douglas Corp. .............. 9,916 679,246
Northrop Grumman Corp. ............... 2,684 235,689
Raytheon Co. ......................... 11,071 564,621
Rockwell International Corp. ......... 10,084 594,956
United Technologies Corp. ............ 11,021 914,743
------------
5,927,765
------------
AIRLINES (0.3%)
AMR Corp. (a) ........................ 4,185 387,113
Delta Air Lines, Inc. ................ 3,502 287,164
Southwest Airlines Co. ............... 6,654 172,172
US Airways Group, Inc. (a) ........... 3,678 128,730
------------
975,179
------------
ALUMINUM (0.4%)
Alcan Aluminum Ltd. .................. 10,458 362,762
Aluminum Co. of America .............. 8,079 608,954
Reynolds Metals Co. .................. 3,379 240,754
------------
1,212,470
------------
AUTOMOBILES (1.5%)
Chrysler Corp. ....................... 31,906 1,046,915
Ford Motor Co. ....................... 54,929 2,073,570
General Motors Corp. ................. 33,827 1,883,741
------------
5,004,226
------------
AUTOPARTS - AFTER MARKET (0.3%)
Cooper Tire & Rubber Co. ............. 3,833 84,326
Echlin Inc. .......................... 2,906 104,616
Genuine Parts Co. .................... 8,438 285,837
Goodyear Tire & Rubber Co. (The) ..... 7,177 454,394
------------
929,173
------------
BEVERAGES - ALCOHOLIC (0.6%)
Anheuser-Busch Cos., Inc. ............ 23,051 966,701
Brown-Forman Corp. Class B ........... 3,149 153,711
Coors (Adolph) Co. Class B ........... 1,722 45,848
Seagram Co. Ltd. ..................... 17,268 695,037
------------
1,861,297
------------
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
<TABLE>
<CAPTION>
Shares Value
============================
BEVERAGES - SOFT DRINKS (3.2%)
<S> <C> <C>
Coca-Cola Co. (d) .................... 114,895 $ 8,013,926
PepsiCo, Inc. ........................ 71,185 2,673,887
------------
10,687,813
------------
BROADCAST/MEDIA (0.4%)
Comcast Corp. Class A ................ 15,128 323,361
Tele-Communications TCI Group
Series A (a) ....................... 30,903 459,682
U.S. West Media Group (a) ............ 28,144 569,916
------------
1,352,959
------------
BUILDING MATERIALS (0.2%)
Masco Corp. .......................... 7,406 309,201
Owens-Corning Corp. .................. 2,354 101,516
Sherwin-Williams Co. ................. 8,030 247,926
------------
658,643
------------
CHEMICALS (2.3%)
Air Products & Chemicals, Inc. ....... 5,154 418,763
Dow Chemical Co. ..................... 10,859 946,090
Du Pont (E.I.) De Nemours & Co. ...... 54,252 3,411,095
Eastman Chemical Co. ................. 3,693 234,505
Goodrich (B.F.) Co. .................. 2,407 104,253
Hercules, Inc. ....................... 4,923 235,689
Monsanto Co. ......................... 27,303 1,175,735
Praxair, Inc. ........................ 7,155 400,680
Rohm & Haas Co. ...................... 2,994 269,647
Union Carbide Corp. .................. 6,123 288,164
------------
7,484,621
------------
CHEMICALS - DIVERSIFIED (0.3%)
Avery Dennison Corp. ................. 4,835 194,005
Engelhard Corp. ...................... 6,671 139,674
FMC Corp. (a) ........................ 1,703 135,282
PPG Industries, Inc. ................. 8,682 504,641
------------
973,602
------------
CHEMICALS - SPECIALTY (0.3%)
Grace (W.R.) & Co. ................... 3,393 187,039
Great Lakes Chemical Corp. ........... 3,002 157,230
Morton International, Inc. ........... 6,585 198,785
Nalco Chemical Co. ................... 3,181 122,866
Sigma-Aldrich Corp. .................. 4,709 165,109
------------
831,029
------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE>
Portfolio of Investments June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
Shares Value
============================
COMMON STOCKS (Continued)
<S> <C> <C>
COMMUNICATION - EQUIPMENT MANUFACTURERS (2.2%)
Andrew Corp. (a) ..................... 4,141 $ 116,466
Bay Networks, Inc. (a) ............... 9,159 243,286
Cabletron Systems, Inc. (a) .......... 7,315 207,106
Cisco Systems, Inc. (a) .............. 30,840 2,070,135
DSC Communications Corp. (a) ......... 5,405 120,261
General Instrument Corp. (a) ......... 6,390 159,750
Lucent Technologies Inc. ............. 29,561 2,130,239
Northern Telecom Ltd. ................ 11,916 1,084,356
Scientific-Atlanta, Inc. ............. 3,561 77,897
Tellabs, Inc. (a) .................... 8,368 467,562
3Com Corp. (a) ....................... 15,423 694,035
------------
7,371,093
------------
COMPUTER - SOFTWARE & SERVICES (3.7%)
Adobe Systems, Inc. .................. 3,334 116,898
Autodesk, Inc. ....................... 2,149 82,334
Automatic Data Processing, Inc. ...... 13,422 630,834
Ceridian Corp. (a) ................... 3,748 158,353
Computer Associates
International, Inc. ................ 16,881 940,061
Computer Sciences Corp. (a) .......... 3,520 253,880
Equifax Inc. ......................... 7,000 260,312
First Data Corp. ..................... 20,836 915,482
Microsoft Corp. (a) .................. 55,513 7,015,455
Novell Inc. (a) ...................... 16,035 111,243
Oracle Corp. (a) ..................... 30,354 1,529,083
Parametric Technology Corp. (a) ...... 5,916 251,800
Shared Medical Systems Corp. ......... 1,079 58,266
------------
12,324,001
------------
COMPUTER SYSTEMS (3.4%)
Amdahl Corp. (a) ..................... 5,438 47,582
Apple Computer, Inc. (a) ............. 5,831 83,092
Compaq Computer Corp. (a) ............ 12,439 1,234,571
Data General Corp. (a) ............... 1,840 47,840
Dell Computer Corp. (a) .............. 7,796 915,543
Digital Equipment Corp. (a) .......... 7,136 252,882
EMC Corp. (a) ........................ 11,574 451,386
Hewlett-Packard Co. .................. 47,104 2,637,824
Intergraph Corp. (a) ................. 2,175 18,487
International Business
Machines Corp. ..................... 46,116 4,159,087
Seagate Technology (a) ............... 11,697 411,588
Silicon Graphics Inc. (a) ............ 8,188 122,820
Sun Microsystems (a) ................. 17,036 634,059
Tandem Computers Inc. (a) ............ 5,383 109,006
Unisys Corp. (a) ..................... 8,035 61,267
------------
11,187,034
------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
============================
CONGLOMERATES (0.3%)
<S> <C> <C>
Tenneco Inc. ......................... 8,053 $ 363,895
Textron Inc. ......................... 7,519 499,074
------------
862,969
------------
CONTAINERS - METAL & GLASS (0.1%)
Ball Corp. ........................... 1,438 43,230
Crown Cork & Seal Co., Inc. .......... 5,910 315,816
------------
359,046
------------
CONTAINERS - PAPER (0.1%)
Bemis Co., Inc. ...................... 2,392 103,753
Stone Container Corp. ................ 4,574 65,465
Temple-Inland Inc. ................... 2,565 138,510
------------
307,728
------------
COSMETICS (1.0%)
Alberto-Culver Co. Class B ........... 2,574 72,072
Avon Products, Inc. .................. 6,246 440,733
Gillette Co. ......................... 25,723 2,437,254
International Flavors &
Fragrances Inc. .................... 5,105 257,803
------------
3,207,862
------------
DRUGS (4.4%)
Lilly (Eli) & Co. .................... 25,465 2,783,643
Merck & Co., Inc. .................... 56,082 5,804,487
Pfizer Inc. .......................... 29,861 3,568,389
Pharmacia & Upjohn, Inc. ............. 23,627 821,038
Schering-Plough Corp. ................ 34,147 1,634,788
------------
14,612,345
------------
ELECTRIC POWER COMPANIES (2.3%)
American Electric Power Co., Inc. .... 8,710 365,820
Baltimore Gas & Electric Co. ......... 6,862 183,130
Carolina Power & Light Co. ........... 7,075 253,816
Central & South West Corp. ........... 9,706 206,252
Cinergy Corp. ........................ 7,345 255,698
Consolidated Edison Co.
of New York, Inc. .................. 10,870 319,986
Dominion Resources, Inc. ............. 8,603 315,085
DTE Energy Co. ....................... 6,771 187,049
Duke Energy Corp. .................... 16,780 804,391
Edison International ................. 19,023 473,197
Entergy Corp. ........................ 11,056 302,658
FPL Group, Inc. ...................... 8,492 391,163
GPU, Inc. ............................ 5,543 198,855
Houston Industries Inc. .............. 10,942 234,569
Niagara Mohawk Power Corp. (a) ....... 6,735 57,668
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
MainStay Equity Index Fund
<TABLE>
<CAPTION>
Shares Value
============================
COMMON STOCKS (Continued)
<S> <C> <C>
ELECTRIC POWER COMPANIES (Continued)
Northern States Power Co. ............ 3,164 $ 163,737
Ohio Edison Co. ...................... 7,042 153,604
PacifiCorp ........................... 13,665 300,630
PECO Energy Co. ...................... 10,272 215,712
PG&E Corp. ........................... 19,232 466,376
PP&L Resources, Inc. ................. 7,398 147,498
Public Service Enterprise
Group Inc. ......................... 10,735 268,375
Southern Co. (The) ................... 31,395 686,765
Texas Utilities Co. .................. 10,423 358,942
Unicom Corp. ......................... 10,004 222,589
Union Electric Co. ................... 4,726 178,111
------------
7,711,676
------------
ELECTRICAL EQUIPMENT (4.0%)
AMP Inc. ............................. 10,071 420,464
Emerson Electric Co. ................. 20,830 1,146,952
General Electric Co. (d) ............. 152,025 9,938,635
General Signal Corp. ................. 2,311 100,817
Grainger (W.W.), Inc. ................ 2,387 186,634
Honeywell, Inc. ...................... 5,862 444,779
Raychem Corp. ........................ 2,071 154,031
Thomas & Betts Corp. ................. 2,452 128,883
Westinghouse Electric Corp. .......... 29,536 683,020
------------
13,204,215
------------
ELECTRONIC - DEFENSE (0.0%) (b)
EG&G, Inc. ........................... 2,199 49,478
------------
ELECTRONIC - INSTRUMENTATION (0.1%)
Perkin-Elmer Corp. ................... 1,979 157,454
Tektronix, Inc. ...................... 1,496 89,760
------------
247,214
------------
ELECTRONIC - SEMICONDUCTORS (3.0%)
Advanced Micro
Devices, Inc. (a) .................. 6,172 222,192
Applied Materials, Inc. (a) .......... 8,298 587,602
Intel Corp. .......................... 38,193 5,416,245
LSI Logic Corp. (a) .................. 6,553 209,696
Micron Technology, Inc. .............. 9,702 387,474
Motorola, Inc. ....................... 27,416 2,083,616
National Semiconductor
Corp. (a) .......................... 6,382 195,449
Texas Instruments, Inc. .............. 8,791 738,993
------------
9,841,267
------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
============================
ENGINEERING & CONSTRUCTION (0.1%)
<S> <C> <C>
Fluor Corp. .......................... 3,856 $ 212,803
Foster Wheeler Corp. ................. 1,874 75,897
------------
288,700
------------
ENTERTAINMENT (1.3%)
King World
Productions, Inc. (a) .............. 1,713 59,955
Time Warner Inc. ..................... 25,980 1,253,535
Viacom, Inc. Class B (a) ............. 16,531 495,930
Walt Disney Co. (The) ................ 31,463 2,524,906
------------
4,334,326
------------
FINANCIAL - MISCELLANEOUS (2.4%)
American Express Co. ................. 22,063 1,643,693
American General Corp. ............... 11,372 543,013
Fannie Mae ........................... 49,316 2,151,411
Federal Home Loan
Mortgage Corp. ..................... 32,265 1,109,109
Green Tree Financial Corp. ........... 6,395 227,822
MBIA Corp. ........................... 2,015 227,317
MBNA Corp. ........................... 15,439 565,453
Morgan Stanley, Dean Witter,
Discover & Co. ..................... 26,638 1,147,099
Transamerica Corp. ................... 3,096 289,670
------------
7,904,587
------------
FOOD DISTRIBUTORS (0.2%)
Cardinal Health, Inc. ................ 5,055 289,399
Fleming Cos., Inc. ................... 1,715 30,870
SuperValu Inc. ....................... 3,184 109,848
Sysco Corp. .......................... 8,354 304,921
------------
735,038
------------
FOODS (2.8%)
Archer-Daniels-Midland Co. ........... 24,825 583,387
Campbell Soup Co. .................... 21,718 1,085,900
ConAgra, Inc. ........................ 11,223 719,675
CPC International Inc. ............... 6,667 615,447
General Mills, Inc. .................. 7,547 491,498
Heinz (H.J.) Co. ..................... 17,165 791,736
Hershey Foods Corp. .................. 7,072 391,170
Kellogg Co. .......................... 9,816 840,495
Quaker Oats Co. ...................... 6,299 282,668
Ralston-Ralston Purina Group ......... 4,912 403,705
Sara Lee Corp. ....................... 22,377 931,443
Unilever, N.V. ....................... 7,447 1,594,123
Wrigley (Wm.) Jr. Co. ................ 5,357 358,919
------------
9,090,166
------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Portfolio of Investments (unaudited) continued
<TABLE>
<CAPTION>
Shares Value
============================
COMMON STOCKS (Continued)
<S> <C> <C>
GOLD (0.3%)
Barrick Gold Corp. ................... 17,337 $ 381,414
Battle Mountain Gold Co. ............. 10,455 59,463
Echo Bay Mines Ltd. .................. 6,488 36,495
Homestake Mining Co. ................. 6,778 88,537
Newmont Mining Corp. ................. 7,288 284,232
Placer Dome Inc. ..................... 11,069 181,255
------------
1,031,396
------------
HARDWARE & TOOLS (0.1%)
Black & Decker Corp. ................. 4,338 161,319
Snap-On, Inc. ........................ 2,885 113,597
Stanley Works (The) .................. 4,116 164,640
------------
439,556
------------
HEALTH CARE - DIVERSIFIED (4.3%)
Abbott Laboratories .................. 35,832 2,391,786
Allergan, Inc. ....................... 2,999 95,406
American Home Products Corp. ......... 29,602 2,264,553
Bristol-Myers Squibb Co. ............. 46,586 3,773,466
Johnson & Johnson .................... 61,792 3,977,860
Mallinckrodt Group Inc. .............. 3,440 134,160
Warner-Lambert Co. ................... 12,585 1,563,686
------------
14,200,917
------------
HEALTH CARE - HMOs (0.2%)
Humana Inc. (a) ...................... 7,530 174,131
United Healthcare Corp. .............. 8,468 440,336
------------
614,467
------------
HEALTH CARE - MISCELLANEOUS (0.4%)
ALZA Corp. (a) ....................... 3,954 114,419
Amgen Inc. (a) ....................... 12,354 718,076
Beverly Enterprises, Inc. (a) ........ 4,674 75,952
HEALTHSOUTH Corp. (a) ................ 15,921 397,030
Manor Care, Inc. ..................... 2,924 95,396
------------
1,400,873
------------
HEAVY TRUCKS & PARTS (0.3%)
Cummins Engine Co., Inc. ............. 1,886 133,081
Dana Corp. ........................... 4,693 178,334
Eaton Corp. .......................... 3,561 310,920
ITT Industries, Inc. ................. 5,491 141,393
Navistar International
Corp. (a) .......................... 3,456 59,616
PACCAR Inc. .......................... 3,647 169,357
------------
992,701
------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
============================
HOMEBUILDING (0.0%) (b)
<S> <C> <C>
Centex Corp. ......................... 1,307 $ 53,097
Kaufman & Broad Home Corp. ........... 1,835 32,227
Pulte Corp. .......................... 1,205 41,648
------------
126,972
------------
HOSPITAL MANAGEMENT (0.5%)
Columbia/HCA Healthcare Corp. ........ 31,055 1,220,850
Tenet Healthcare Corp. (a) ........... 13,943 412,190
------------
1,633,040
------------
HOTEL - MOTEL (0.3%)
Harrah's Entertainment, Inc. (a) ..... 4,772 87,089
Hilton Hotels Corp. .................. 11,576 307,487
ITT Corp. (a) ........................ 5,465 333,707
Marriott International Inc. .......... 5,965 366,102
------------
1,094,385
------------
HOUSEHOLD - FURNISHINGS & APPLIANCES (0.1%)
Armstrong World
Industries, Inc. ................... 1,752 128,553
Maytag Corp. ......................... 4,641 121,246
Whirlpool Corp. ...................... 3,398 185,403
------------
435,202
------------
HOUSEHOLD PRODUCTS (2.1%)
Clorox Co. (The) ..................... 2,386 314,952
Colgate-Palmolive Co. ................ 13,732 896,013
Kimberly-Clark Corp. ................. 26,151 1,301,012
Procter & Gamble Co. (The) ........... 31,591 4,462,229
------------
6,974,206
------------
HOUSEWARES (0.3%)
Fortune Brands, Inc. ................. 7,965 297,194
Newell Co. ........................... 7,314 289,817
Rubbermaid Inc. ...................... 7,047 209,649
Tupperware Corp. ..................... 2,824 103,076
------------
899,736
------------
INSURANCE BROKERS (0.3%)
Aon Corp. ............................ 7,479 387,038
Marsh & McLennan Cos., Inc. .......... 7,646 545,734
------------
932,772
------------
INVESTMENT BANK/BROKERAGE (0.5%)
Merrill Lynch & Co., Inc. ............ 15,162 904,034
Salomon Inc. ......................... 4,998 278,014
Schwab (Charles) Corp. ............... 8,171 332,458
------------
1,514,506
------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
MainStay Equity Index Fund
<TABLE>
<CAPTION>
Shares Value
============================
COMMON STOCKS (Continued)
<S> <C> <C>
LEISURE TIME (0.0%) (b)
Brunswick Corp. ...................... 4,598 $ 143,688
------------
LIFE INSURANCE (0.7%)
Aetna Inc. ........................... 6,939 710,380
Conseco Inc. ......................... 8,816 326,192
Jefferson-Pilot Corp. ................ 3,326 232,404
Lincoln National Corp. ............... 4,846 311,961
Torchmark Corp. ...................... 3,317 236,337
UNUM Corp. ........................... 6,687 280,854
------------
2,098,128
------------
MACHINE TOOLS (0.0%) (b)
Cincinnati Milacron Inc. ............. 1,842 47,777
Giddings & Lewis, Inc. ............... 1,518 31,688
------------
79,465
------------
MACHINERY - DIVERSIFIED (0.9%)
Briggs & Stratton Corp. .............. 1,332 66,600
Case Corp. ........................... 3,340 230,042
Caterpillar Inc. ..................... 8,895 955,101
Cooper Industries Inc. ............... 5,510 274,123
Deere & Co. .......................... 12,105 664,262
Harnischfeger Industries, Inc. ....... 2,214 91,881
Ingersoll-Rand Co. ................... 5,083 313,875
NACCO Industries, Inc. Class A ....... 403 22,744
Thermo Electron Corp. (a) ............ 6,953 236,402
Timken Co. (The) ..................... 2,928 104,127
------------
2,959,157
------------
MAJOR REGIONAL BANKS (4.6%)
Banc One Corp. ....................... 23,199 1,123,702
Bank of New York Co.,
Inc. (The) ......................... 18,054 785,349
BankBoston Corp. ..................... 7,053 508,257
Barnett Banks, Inc. .................. 9,219 483,997
Comerica Inc. ........................ 4,952 336,736
CoreStates Financial Corp. ........... 9,599 515,946
Fifth Third Bancorp .................. 4,800 393,750
First Bank System, Inc. .............. 6,200 529,325
First Union Corp. .................... 13,246 1,225,255
Fleet Financial Group, Inc. .......... 12,161 769,183
KeyCorp .............................. 10,415 581,938
Mellon Bank Corp. .................... 12,044 543,486
National City Corp. .................. 10,284 539,910
NationsBank Corp. .................... 33,720 2,174,940
Norwest Corp. ........................ 17,065 959,906
</TABLE>
<TABLE>
<CAPTION>
Shares Value
============================
MAJOR REGIONAL BANKS (Continued)
<S> <C> <C>
PNC Bank Corp. ....................... 14,959 $ 622,668
Republic New York Corp. .............. 2,570 276,275
SunTrust Banks, Inc. ................. 10,495 577,881
U.S. Bancorp ......................... 7,144 458,109
Wachovia Corp. ....................... 7,821 456,062
Wells Fargo & Co. .................... 4,339 1,169,361
------------
15,032,036
------------
MANUFACTURED HOUSING (0.0%) (b)
Fleetwood Enterprises Inc. ........... 1,667 49,697
------------
MANUFACTURING - DIVERSIFIED (1.0%)
Aeroquip-Vickers Inc. ................ 1,294 61,141
AlliedSignal Inc. .................... 13,058 1,096,872
Crane Co. ............................ 2,169 90,691
Dover Corp. .......................... 5,287 325,150
Illinois Tool Works Inc. ............. 11,326 565,592
Johnson Controls, Inc. ............... 3,801 156,079
Millipore Corp. ...................... 2,020 88,880
Pall Corp. ........................... 5,772 134,199
Parker-Hannifin Corp. ................ 3,486 211,557
Tyco International Ltd. .............. 7,754 539,388
------------
3,269,549
------------
MEDICAL PRODUCTS (1.0%)
Bard (C.R.), Inc. .................... 2,693 97,790
Bausch & Lomb Inc. ................... 2,588 121,960
Baxter International Inc. ............ 12,628 659,813
Becton, Dickinson & Co. .............. 5,802 293,726
Biomet, Inc. ......................... 5,431 101,152
Boston Scientific Corp. (a) .......... 9,006 553,306
Guidant Corp. ........................ 3,435 291,975
Medtronic, Inc. ...................... 11,133 901,773
St. Jude Medical, Inc. (a) ........... 4,199 163,761
United States Surgical Corp. ......... 3,233 120,429
------------
3,305,685
------------
METALS - MISCELLANEOUS (0.3%)
ASARCO Inc. .......................... 1,933 59,198
Cyprus Amax Minerals Co. ............. 4,293 105,178
Freeport-McMoRan
Copper & Gold Inc. Class B ......... 8,993 279,907
Inco Ltd. ............................ 7,792 234,247
Phelps Dodge Corp. ................... 3,044 259,311
------------
937,841
------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE>
Portfolio of Investments (unaudited) continued
<TABLE>
<CAPTION>
Shares Value
============================
COMMON STOCKS (Continued)
<S> <C> <C>
MISCELLANEOUS (1.4%)
Airtouch Communications, Inc. (a) .... 23,155 $ 633,868
American Greetings Corp. Class A ..... 3,514 130,457
Corning Inc. ......................... 10,732 596,968
Harcourt General, Inc. ............... 3,299 157,115
Harris Corp. ......................... 1,847 155,148
Jostens, Inc. ........................ 1,787 47,132
Minnesota Mining &
Manufacturing Co. .................. 19,473 1,986,246
Pioneer Hi-Bred
International, Inc. ................ 3,846 307,680
TRW, Inc. ............................ 5,940 337,466
Whitman Corp. ........................ 4,887 123,702
------------
4,475,782
------------
MONEY CENTER BANKS (2.7%)
BankAmerica Corp. .................... 32,932 2,126,172
Bankers Trust New York Corp. ......... 3,698 321,726
Chase Manhattan Corp. ................ 20,326 1,972,893
Citicorp ............................. 21,338 2,572,563
First Chicago Corp. .................. 14,732 891,286
Morgan (J.P.) & Co., Inc. ............ 8,617 899,399
------------
8,784,039
------------
MULTI-LINE INSURANCE (1.9%)
American International
Group, Inc. ........................ 21,772 3,252,193
CIGNA Corp. .......................... 3,565 632,787
Hartford Financial Services
Group, Inc. ........................ 5,479 453,387
Travelers Group Inc. ................. 29,731 1,874,911
------------
6,213,278
------------
NATURAL GAS DISTRIBUTORS & PIPELINES (0.7%)
Coastal Corp. (The) .................. 4,897 260,459
Columbia Gas System, Inc. ............ 2,548 166,257
Consolidated Natural Gas Co. ......... 4,305 231,663
Eastern Enterprises .................. 913 31,670
Enron Corp. .......................... 11,647 475,343
ENSERCH Corp. ........................ 3,181 70,777
NICOR Inc. ........................... 2,349 84,271
NorAm Energy Corp. ................... 6,293 95,968
ONEOK Inc. ........................... 1,269 40,846
Pacific Enterprises .................. 3,850 129,456
Peoples Energy Corp. ................. 1,653 61,884
Sonat, Inc. .......................... 3,951 202,489
Williams Cos., Inc. (The) ............ 7,291 318,981
------------
2,170,064
------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
============================
OFFICE EQUIPMENT & SUPPLIES (0.5%)
<S> <C> <C>
Moore Corp. Ltd. ..................... 4,092 $ 80,561
Pitney Bowes Inc. .................... 6,907 492,124
Xerox Corp. .......................... 15,019 1,184,624
------------
1,757,309
------------
OIL & GAS DRILLING (0.1%)
Helmerich & Payne, Inc. .............. 1,115 64,252
Rowan Cos., Inc. (a) ................. 3,877 109,283
------------
173,535
------------
OIL - EXPLORATION & PRODUCTION (0.2%)
Burlington Resources Inc. ............ 5,850 258,131
Oryx Energy Co. (a) .................. 4,735 100,027
Santa Fe Energy
Resources, Inc. (a) ................ 4,651 68,311
Union Pacific
Resources Group, Inc. .............. 11,627 289,222
------------
715,691
------------
OIL - INTEGRATED DOMESTIC (1.1%)
Amerada Hess Corp. ................... 4,279 237,752
Ashland Inc. ......................... 3,493 161,988
Atlantic Richfield Co. ............... 15,524 1,094,442
Kerr-McGee Corp. ..................... 2,316 146,777
Louisiana Land & Exploration
Co. (The) .......................... 1,618 92,428
Occidental Petroleum Corp. ........... 15,323 384,033
Pennzoil Co. ......................... 2,108 161,789
Phillips Petroleum Co. ............... 12,150 531,561
Sun Co., Inc. ........................ 3,429 106,299
Unocal Corp. ......................... 11,514 446,887
USX-Marathon Group ................... 13,363 385,857
------------
3,749,813
------------
OIL - INTEGRATED INTERNATIONAL (6.3%)
Amoco Corp. .......................... 23,139 2,011,647
Chevron Corp. ........................ 30,232 2,235,278
Exxon Corp. (d) ...................... 115,320 7,092,180
Mobil Corp. .......................... 36,624 2,559,102
Royal Dutch Petroleum Co. ............ 24,893 5,414,228
Texaco Inc. .......................... 12,281 1,335,559
------------
20,647,994
------------
OIL - WELL EQUIPMENT & SERVICES (0.8%)
Baker Hughes Inc. .................... 6,628 256,421
Dresser Industries, Inc. ............. 8,344 310,814
Halliburton Co. ...................... 5,834 462,345
McDermott International, Inc. ........ 2,541 74,165
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE>
MainStay Equity Index Fund
<TABLE>
<CAPTION>
Shares Value
============================
COMMON STOCKS (Continued)
<S> <C> <C>
OIL - WELL EQUIPMENT & SERVICES (Continued)
Schlumberger Ltd. .................... 11,427 $ 1,428,375
Western Atlas Inc. (a) ............... 2,460 180,195
------------
2,712,315
------------
PAPER & FOREST PRODUCTS (0.8%)
Boise Cascade Corp. .................. 2,243 79,206
Champion International Corp. ......... 4,434 244,978
Georgia-Pacific Corp. ................ 4,232 361,307
International Paper Co. .............. 13,856 672,882
James River Corp. of Virgina ......... 3,995 147,815
Louisiana-Pacific Corp. .............. 4,978 105,160
Mead Corp. ........................... 2,410 150,023
Potlatch Corp. ....................... 1,311 59,323
Union Camp Corp. ..................... 3,193 159,650
Westvaco Corp. ....................... 4,729 148,668
Weyerhaeuser Co. ..................... 9,196 478,192
Willamette Industries, Inc. .......... 2,567 179,690
------------
2,786,894
------------
PERSONAL LOANS (0.3%)
Beneficial Corp. ..................... 2,518 178,935
Countrywide Credit Industries, Inc. .. 4,900 152,819
Household International, Inc. ........ 4,987 585,661
Providian Financial Corp. ............ 4,302 138,202
------------
1,055,617
------------
PHOTOGRAPHY/IMAGING (0.5%)
Eastman Kodak Co. .................... 15,607 1,197,837
IKON Office Solutions, Inc. .......... 6,305 157,231
Polaroid Corp. ....................... 2,137 118,604
------------
1,473,672
------------
POLLUTION CONTROL (0.3%)
Browning-Ferris Industries Inc. ...... 9,882 328,577
Waste Management Inc. ................ 20,914 671,862
------------
1,000,439
------------
PROPERTY - CASUALTY INSURANCE (1.3%)
Allstate Corp. (The) ................. 20,623 1,505,479
Chubb Corp. .......................... 8,094 541,286
General Re Corp. ..................... 3,825 696,150
Loews Corp. .......................... 5,353 535,969
MGIC Investment Corp. ................ 5,515 264,376
SAFECO Corp. ......................... 5,887 274,849
St. Paul Cos., Inc. (The) ............ 3,923 299,129
USF&G Corp. .......................... 5,371 128,904
------------
4,246,142
------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
============================
PUBLISHING (0.1%)
<S> <C> <C>
McGraw-Hill Cos., Inc. (The) ......... 4,670 $ 274,654
Meredith Corp. ....................... 2,621 76,009
------------
350,663
------------
PUBLISHING - NEWSPAPER (0.5%)
Dow Jones & Co., Inc. ................ 4,512 181,326
Gannett Co., Inc. .................... 6,577 649,479
Knight-Ridder Inc. ................... 4,403 216,022
New York Times Co. (The) Class A ..... 4,533 228,917
Times Mirror Co. (The) Class A ....... 4,388 249,293
Tribune Co. .......................... 5,639 271,024
------------
1,796,061
------------
RAILROADS (0.8%)
Burlington Northern
Santa Fe Corp. ..................... 7,129 640,719
CSX Corp. ............................ 9,873 547,952
Norfolk Southern Corp. ............... 5,853 589,690
Union Pacific Corp. .................. 11,379 802,219
------------
2,580,580
------------
RESTAURANTS (0.5%)
Darden Restaurants, Inc. ............. 7,441 67,434
McDonald's Corp. ..................... 31,992 1,545,614
Wendy's International, Inc. .......... 5,869 152,227
------------
1,765,275
------------
RETAIL STORES - APPAREL (0.3%)
Charming Shoppes, Inc. (a) ........... 4,878 25,457
Gap, Inc. (The) ...................... 13,002 505,453
Limited, Inc. (The) .................. 12,592 254,988
TJX Cos., Inc. (The) ................. 6,910 182,251
------------
968,149
------------
RETAIL STORES - DEPARTMENT (0.6%)
Dillard's Inc. Class A ............... 5,287 183,062
Federated Department Stores,
Inc. (a) ........................... 9,583 333,009
May Department Stores Co. ............ 10,989 519,230
Mercantile Stores Co., Inc. .......... 1,697 106,805
Nordstrom, Inc. ...................... 3,797 186,291
Penney (J.C.) Co., Inc. .............. 11,241 586,640
------------
1,915,037
------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
<PAGE>
Portfolio of Investments (unaudited) continued
<TABLE>
<CAPTION>
Shares Value
============================
COMMON STOCKS (Continued)
<S> <C> <C>
RETAIL STORES - DRUG (0.3%)
Longs Drug Stores Corp. .............. 1,793 $ 46,954
Rite-Aid Corp. ....................... 5,736 286,083
Walgreen Co. ......................... 11,435 613,202
------------
946,239
------------
RETAIL STORES - FOOD CHAIN (0.5%)
Albertson's, Inc. .................... 11,649 425,188
American Stores Co. .................. 6,741 332,837
Giant Food, Inc. Class A ............. 2,767 89,581
Great Atlantic & Pacific Tea Co.,
Inc. (The) ......................... 1,929 52,445
Kroger Co. (a) ....................... 11,631 337,299
Winn-Dixie Stores, Inc. .............. 7,047 262,501
------------
1,499,851
------------
RETAIL STORES - GENERAL MERCHANDISE (1.6%)
Dayton-Hudson Corp. .................. 10,163 540,545
Kmart Corp. (a) ...................... 22,329 273,530
Sears, Roebuck & Co. ................. 18,174 976,852
Wal-Mart Stores, Inc. ................ 105,180 3,556,399
------------
5,347,326
------------
RETAIL STORES - SPECIALTY (1.1%)
Autozone, Inc. (a) ................... 6,960 163,995
Circuit City Stores - Circuit City
Group .............................. 4,584 163,019
Costco Cos., Inc. .................... 9,694 318,690
CVS Corp. ............................ 7,701 394,676
Home Depot, Inc. (The) ............... 22,540 1,553,851
Lowe's Cos., Inc. .................... 8,028 298,040
Pep Boys-Manny, Moe & Jack ........... 2,909 99,088
Tandy Corp. .......................... 2,765 154,840
Toys "R" Us, Inc. (a) ................ 13,306 465,710
Woolworth Corp. (a) .................. 6,188 148,512
------------
3,760,421
------------
SAVINGS & LOANS (0.2%)
Ahmanson (H.F.) & Co. ................ 4,923 211,689
Golden West Financial Corp. .......... 2,740 191,800
Great Western Financial Corp. ........ 6,372 342,495
------------
745,984
------------
SHOES (0.3%)
Nike Inc. Class B .................... 13,368 780,357
Reebok International Ltd. ............ 2,572 120,241
</TABLE>
<TABLE>
<CAPTION>
Shares Value
============================
SHOES (Continued)
<S> <C> <C>
Stride Rite Corp. .................... 2,231 $ 28,724
------------
929,322
------------
SPECIALIZED SERVICES (0.8%)
Block (H&R), Inc. .................... 4,870 157,057
Cognizant Corp. ...................... 7,908 320,274
CUC International Inc. (a) ........... 19,002 490,489
Dun & Bradstreet Corp. (The) ......... 7,904 207,480
Ecolab Inc. .......................... 2,975 142,056
HFS Inc. (a) ......................... 7,252 420,616
Interpublic Group of Cos., Inc. ...... 3,667 224,833
Laidlaw Inc. Class B ................. 14,626 202,022
National Service Industries, Inc. .... 2,175 105,895
Safety-Kleen Corp. ................... 2,626 44,314
Service Corp. International .......... 10,848 356,628
------------
2,671,664
------------
SPECIALTY PRINTING (0.1%)
Deluxe Corp. ......................... 3,835 130,869
Donnelley (R.R.) & Sons Co. .......... 7,073 259,049
Harland (John H.) Co. ................ 1,464 33,397
------------
423,315
------------
STEEL (0.2%)
Allegheny Teledyne Inc. .............. 8,044 217,188
Armco Inc. (a) ....................... 5,023 19,464
Bethlehem Steel Corp. (a) ............ 5,260 54,901
Inland Steel Industries Inc. ......... 2,248 58,729
Nucor Corp. .......................... 4,084 233,809
USX-U.S. Steel Group ................. 3,867 135,587
Worthington Industries, Inc. ......... 4,492 82,260
------------
801,938
------------
TELECOMMUNICATIONS - LONG DISTANCE (1.9%)
AT&T Corp. ........................... 75,136 2,634,456
MCI Communications Corp. ............. 31,931 1,222,360
Sprint Corp. ......................... 20,126 1,059,131
WorldCom, Inc. (a) ................... 41,459 1,326,688
------------
6,242,635
------------
TELEPHONE (3.8%)
ALLTEL Corp. ......................... 8,783 293,682
Ameritech Corp. ...................... 25,667 1,743,752
Bell Atlantic Corp. .................. 20,346 1,543,753
BellSouth Corp. ...................... 46,033 2,134,780
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
<PAGE>
MainStay Equity Index Fund
<TABLE>
<CAPTION>
Shares Value
============================
COMMON STOCKS (Continued)
<S> <C> <C>
TELEPHONE (Continued)
Frontier Corp. ....................... 7,554 $ 150,608
GTE Corp. ............................ 44,684 1,960,510
NYNEX Corp. .......................... 20,278 1,168,520
SBC Communications Inc. .............. 42,332 2,619,292
US West, Inc. ........................ 22,020 829,879
------------
12,444,776
------------
TEXTILES - APPAREL MANUFACTURERS (0.2%)
Fruit Of The Loom, Inc. Class A (a) .. 3,515 108,965
Liz Claiborne, Inc. .................. 3,417 159,318
Russell Corp. ........................ 1,843 54,599
Springs Industries, Inc. Class A ..... 899 47,422
VF Corp. ............................. 2,956 251,629
------------
621,933
------------
TOBACCO (1.6%)
Philip Morris Cos. ................... 112,831 5,006,875
UST Inc. ............................. 8,737 242,452
------------
5,249,327
------------
TOYS (0.2%)
Hasbro Inc. .......................... 6,045 171,527
Mattel, Inc. ......................... 13,439 455,246
------------
626,773
------------
TRANSPORTATION - MISCELLANEOUS (0.1%)
Federal Express Corp. (a) ............ 5,287 305,324
Ryder System, Inc. ................... 3,657 120,681
------------
426,005
------------
TRUCKERS (0.0%) (b)
Caliber System, Inc. ................. 1,851 68,950
------------
Total Common Stocks
(Cost $216,837,745) ................ $315,848,305(c)
------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
============================
SHORT-TERM INVESTMENTS (3.8%)
<S> <C> <C>
COMMERCIAL PAPER (2.2%)
Dynamic Funding Corp.
5.75%, due 7/11/97 (d) ............. 500,000 $ 499,201
5.82%, due 7/2/97 (d) .............. 200,000 199,968
Riverside Funding Corp. ..............
5.68%, due 7/11/97 (d) ............. 800,000 798,738
5.85%, due 7/8/97 (d) .............. 600,000 599,317
Shinhan Bank
5.90%, due 7/1/97-7/7/97 (d) ....... 800,000 799,803
5.92%, due 8/22/97 (d) ............. 300,000 297,435
5.93%, due 8/19/97-8/26/97 (d) ..... 4,100,000 4,064,865
------------
Total Commercial Paper
(Cost $7,259,327) .................. 7,259,327
------------
U.S. GOVERNMENT (1.6%)
United States Treasury Bills
4.82%, due 9/11/97 (d) ............. 3,000,000 2,969,037
4.86%, due 9/18/97 (d) ............. 2,500,000 2,471,722
------------
Total U.S. Government
(Cost $5,444,927) .................. 5,440,759
------------
Total Short-Term Investments
(Cost $12,704,254) ................. 12,700,086
------------
Total Investments
(Cost $229,541,999) (e) ............ 99.6% 328,548,391(f)
Cash and Other Assets,
Less Liabilities ................... 0.4 1,276,256
------------ ------------
Net Assets ........................... 100.0% $329,824,647
============ ============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
<PAGE>
Portfolio of Investments (unaudited) continued
<TABLE>
<CAPTION>
Contracts Unrealized
Long Appreciation
============================
FUTURES CONTRACTS (0.0%) (b)
<S> <C> <C>
Standard & Poor's 500
September 1997 ..................... 27 $ 50,271
------------
Total Futures Contracts
(Settlement Value $12,018,375) ..... $ 50,271(g)
============
</TABLE>
- ----------
(a) Non-income producing securities.
(b) Less than one tenth of a percent.
(c) The combined market value of common stocks and settlement value of Standard
& Poor's 500 Index futures contracts represents 99.4% of net assets.
(d) Segregated or partially segregated as collateral for futures contracts.
(e) The cost for Federal income tax purposes is $229,604,899.
(f) At June 30, 1997, net unrealized appreciation was $98,943,492, based on
cost for Federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $100,987,559 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $2,044,067.
(g) Represents the difference between the value of the contracts at the time
they were opened and the value at June 30, 1997.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
<PAGE>
Statement of Assets and Liabilities as of June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investment in securities, at value (identified cost $229,541,999) $328,548,391
Cash ............................................................ 28,793
Receivables:
Fund shares sold .............................................. 2,430,891
Investment securities sold .................................... 970,576
Dividends and interest ........................................ 421,025
Unamortized organization expense ................................ 43,323
------------
Total assets ................................................. 332,442,999
------------
LIABILITIES:
Payables:
Investment securities purchased ............................... 2,059,502
Fund shares redeemed .......................................... 222,995
NYLIFE Distributors ........................................... 100,100
Transfer agent ................................................ 34,913
NYLIFE Inc. ................................................... 33,000
Management .................................................... 26,271
Custodian ..................................................... 5,305
Accrued expenses ................................................ 77,865
Variation margin payable on futures contracts ................... 58,401
------------
Total liabilities ............................................ 2,618,352
------------
Net Assets ...................................................... $329,824,647
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding
(par value of $.01 per share)
unlimited number of shares authorized ......................... $ 117,448
Additional paid-in capital ...................................... 224,387,035
Accumulated undistributed net investment income ................. 1,659,640
Accumulated undistributed net realized
gain on investments ........................................... 4,603,861
Net unrealized appreciation on investments ...................... 99,056,663
------------
Net assets applicable to outstanding shares ..................... $329,824,647
============
Shares of beneficial interest outstanding ....................... 11,744,821
============
Net asset value per share outstanding ........................... $ 28.08
Maximum sales charge (3.00% of offering price) .................. 0.87
------------
Maximum offering price per share outstanding .................... $ 28.95
============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
22
<PAGE>
Statement of Operations for the six months ended June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Income:
Dividends (a) ................................................. $ 2,387,379
Interest ...................................................... 352,359
------------
Total income ................................................. 2,739,738
------------
Expenses:
Administration ................................................ 540,049
Distribution .................................................. 337,531
Transfer agent ................................................ 160,311
Management .................................................... 135,012
Shareholder communication ..................................... 45,225
Registration .................................................. 34,142
Custodian ..................................................... 28,219
Professional .................................................. 18,258
Amortization of organization costs ............................ 6,188
Trustees ...................................................... 3,230
Miscellaneous ................................................. 2,951
------------
Total expenses before reimbursement .......................... 1,311,116
Expense reimbursement from Administrator ........................ (231,018)
------------
Net expenses ................................................. 1,080,098
------------
Net investment income ........................................... 1,659,640
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from:
Security transactions ......................................... 1,407,577
Futures transactions .......................................... 1,989,329
------------
Net realized gain on investments ................................ 3,396,906
------------
Net change in unrealized appreciation on investments:
Security transactions ......................................... 45,627,232
Futures transactions .......................................... 77,330
------------
Net unrealized gain on investments .............................. 45,704,562
------------
Net realized and unrealized gain on investments ................. 49,101,468
------------
Net increase in net assets resulting from operations ............ $ 50,761,108
============
</TABLE>
- ----------
(a) Dividends recorded net of foreign withholding taxes of $18,250.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
23
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six months
ended Year ended
June 30, December 31,
1997* 1996
============= =============
INCREASE IN NET ASSETS:
<S> <C> <C>
Operations:
Net investment income ......................................... $ 1,659,640 $ 2,880,833
Net realized gain on investments .............................. 3,396,906 5,505,296
Net change in unrealized appreciation on investments .......... 45,704,562 25,632,481
------------- -------------
Net increase in net assets resulting from operations .......... 50,761,108 34,018,610
------------- -------------
Dividends and distributions to shareholders:
From net investment income .................................... -- (4,255,511)
From net realized gain on investments ......................... -- (6,641,480)
------------- -------------
Total dividends and distributions to shareholders ............ -- (10,896,991)
------------- -------------
Capital share transactions:
Net proceeds from sale of shares .............................. 79,043,136 99,873,971
Net asset value of shares issued to shareholders
in reinvestment of dividends and distributions .............. -- 10,618,632
------------- -------------
79,043,136 110,492,603
Cost of shares redeemed ....................................... (25,729,208) (17,172,280)
------------- -------------
Increase in net assets derived from capital share transactions 53,313,928 93,320,323
------------- -------------
Net increase in net assets ................................... 104,075,036 116,441,942
NET ASSETS:
Beginning of period ............................................. 225,749,611 109,307,669
------------- -------------
End of period ................................................... $ 329,824,647 $ 225,749,611
============= =============
Accumulated undistributed net investment income ................. $ 1,659,640 $ --
============= =============
</TABLE>
- ----------
* Unaudited.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
24
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
December 20
September 1 1990(a)
Six months Year ended Year ended through Year ended August 31 through
ended December 31 December 31 December 31 ============================ August 31,
June 30, 1997* 1996 1995 1994** 1994 1993 1992 1991
============= ========== =========== =========== ======== ======== ======== ========
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ............. $ 23.37 $ 19.15 $ 14.09 $ 14.48 $ 13.84 $ 12.15 $ 11.41 $ 9.45
-------- -------- -------- -------- -------- -------- -------- --------
Net investment
income .......................... 0.12 0.30 0.24 0.09 0.27 0.22 0.18 0.11
Net realized and unrealized
gain (loss) on investments ...... 4.59 3.92 4.82 (0.48) 0.37 1.47 0.56 1.85
-------- -------- -------- -------- -------- -------- -------- --------
Total from investment operations .. 4.71 4.22 5.06 (0.39) 0.64 1.69 0.74 1.96
-------- -------- -------- -------- -------- -------- -------- --------
Less dividends and distributions:
From net investment income ........ -- (0.54) (0.27) -- (0.25) (0.18) (0.17) --
From net realized gain
on investments .................. -- (0.82) (0.27) -- (0.18) (0.02) (0.04) --
-------- -------- -------- -------- -------- -------- -------- --------
Total dividends and distributions . -- (1.36) (0.54) -- (0.43) (0.20) (0.21)
-------- -------- -------- -------- -------- -------- -------- --------
Reverse Share Split ............... -- 1.36 0.54 -- 0.43 0.20 0.21 --
-------- -------- -------- -------- -------- -------- -------- --------
Net asset value at end of period .. $ 28.08 $ 23.37 $ 19.15 $ 14.09 $ 14.48 $ 13.84 $ 12.15 $ 11.41
======== ======== ======== ======== ======== ======== ======== ========
Total investment return (b) ....... 20.15% 22.04% 35.91 % (2.68%) 4.59% 13.91% 6.49% 20.74%
Ratios (to average net assets)/
Supplemental Data:
Net investment income .......... 1.23%+ 1.8% 1.7 % 2.0%+ 1.9% 1.9% 1.8% 1.9%+
Expenses ....................... 0.80%+ 0.8% 1.1 % 0.9%+ 0.9% 0.9% 1.2% 1.4%+
Expenses (before
reimbursement) ............... 0.97%+ 1.0% 1.1 % 0.9%+ 0.9% 0.9% 1.2% 1.4%+
Portfolio turnover rate ........... 4% 3% 4 % 2% 12% 4% 3% 1%
Average commission rate paid ...... $ 0.0497 $ 0.0465 (c) (c) (c) (c) (c) (c)
Net assets at end of
period (in 000's) ............... $329,825 $225,750 $109,308 $ 61,561 $ 62,828 $ 62,921 $ 41,742 $ 23,534
</TABLE>
- ----------
* Unaudited.
** The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized.
(a) Commencement of operations.
(b) Total return is calculated exclusive of sales charge and is not annualized.
(c) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
25
<PAGE>
MainStay Equity Index Fund
Note 1--Organization and Business:
The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business
Trust. The Trust is registered under the Investment Company Act of 1940, as
amended, (the "Act") as an open-end management investment company and is
comprised of fourteen funds. These financial statements and notes relate only to
MainStay Equity Index Fund (the "Fund"). The Fund's objective is to provide
investment results that correspond to the total return performance of publicly
traded common stocks represented by the Standard & Poor's 500 Composite Stock
Price Index.
Note 2--Significant Account Policies:
The following is a summary of significant accounting policies followed by the
Fund:
Valuation of Fund Shares. The net asset value per share is calculated on each
day the New York Stock Exchange (the "Exchange") is open for trading as of close
of regular trading on the Exchange. The net asset value per share is determined
by taking the assets attributable to the shares, subtracting the liabilities
attributable to the shares, and dividing the result by the outstanding shares.
Securities Valuation. Portfolio securities of the Fund are stated at value
determined (a) by appraising common and preferred stocks which are traded on the
New York Stock Exchange at the last sale price on that day or, if no sale
occurs, at the mean between the closing bid and asked prices, (b) by appraising
common and preferred stocks traded on other United States national securities
exchanges as nearly as possible in the manner described in (a) by reference to
their principal exchange, including the National Association of Securities
Dealers National Market System, (c) by appraising over-the-counter securities
quoted on the National Association of Securities Dealers NASDAQ system (but not
listed on the National Market System) at the bid price supplied through such
system, (d) by appraising over-the-counter securities not quoted on the NASDAQ
system at prices supplied by the pricing agent or brokers selected by the
Adviser, if these prices are deemed to be representative of market values at the
regular close of business of the New York Stock Exchange. Short-term securities
which mature in more than 60 days are valued at current market quotations.
Short-term securities which mature in 60 days or less are valued at amortized
cost if their term to maturity at purchase was 60 days or less, or by amortizing
the difference between market value on the 61st day prior to maturity and value
on maturity date if their original term to maturity at purchase exceeded 60
days.
Futures Contracts. A futures contract is an agreement to purchase or sell a
specified quantity of an underlying instrument at a specified future date, or to
make or receive a cash payment based on the value of a securities index. During
the period the futures contract is open, changes in the value of the contract
are recognized as unrealized gains or losses by "marking to market" such
contract on a daily basis to reflect the market value of the contract at the end
of each day's trading. The Fund agrees to receive from or pay to the broker an
amount of cash equal to the daily fluctuation in the value of the contract. Such
receipts or payments are known as "variation margin". When the futures contract
is closed, the Fund records a realized gain or loss
26
<PAGE>
Notes to Financial Statements (unaudited)
equal to the difference between the proceeds from (or cost of) the closing
transaction and the Fund's basis in the contract. The Fund invests in stock
index futures contracts to gain full exposure to changes in stock market prices
to fulfill its investment objective.
The use of futures contracts involves, to varying degrees, elements of market
risk in excess of the amount recognized in the statement of assets and
liabilities. The contract or notional amounts and variation margin reflect the
extent of the Fund's involvement in long futures positions. Risks arise from the
possible imperfect correlation in movements in the price of futures contracts,
interest rates and the underlying hedged assets, and the possible inability of
counterparties to meet the terms of their contracts. However, the Fund's
activities in futures contracts are conducted through regulated exchanges which
minimize counterparty credit risks.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Dividends and Distributions to Shareholders. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
annually. Income dividends and capital gain distributions are determined in
accordance with Federal income tax regulations which may differ from generally
accepted accounting principles.
Security Transactions and Investment Income. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued daily.
Organization costs. Costs incurred in connection with the Fund's initial
organization and registration totalled $124,798. Such costs are being amortized
over ten years beginning at the commencement of operations of the Fund. This
period corresponds to the guarantee period of the original offering (See Note
6).
In the event NYLIFE Securities Inc. redeems any of the shares initially
purchased, the proceeds of such redemption will be reduced by the proportionate
amount of the unamortized deferred organizational expenses which the number of
shares redeemed by it bears to the total number of initial shares purchased by
it.
Expenses. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when allocations of direct expenses can otherwise fairly be
made.
27
<PAGE>
MainStay Equity Index Fund
Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
Note 3--Fees and Related Party Policies:
Investment Management and Administration Fees. Monitor Capital Advisors, Inc.
("Monitor") acts as investment manager to the Fund under an Investment
Management Agreement. Monitor is a registered investment adviser and an indirect
wholly-owned subsidiary of New York Life Insurance Company ("New York Life").
NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly-owned
subsidiary of New York Life, is the Administrator for the Fund.
The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an annual
rate of 0.10% and 0.40%, respectively, of the average daily net assets of the
Fund.
In the event the total expenses of the Fund (including 12b-1 fees) for any
fiscal year exceed 0.80% of the value of the Fund's average annual net assets,
the Administrator will reduce its fee payable by the Fund by the difference
between the Fund's total expenses and 0.80%. This reduction amounted to $231,018
for the six months ended June 30, 1997. This fee waiver is voluntary and may be
terminated at any time.
Distribution Fees. The Trust, on behalf of the Fund, has a Distribution
Agreement with NYLIFE Distributors (the "Distributor"). The Fund has adopted a
Distribution Plan (the "Plan") in accordance with the provisions of Rule 12b-1
under the 1940 Act.
Pursuant to the Plan, the Distributor receives payments from the Fund at an
annual rate of 0.25% of the average daily net assets of the Fund's shares, which
is an expense of the Fund for distribution or service activities as designated
by the Distributor.
The Plan provides that the distribution fee is payable to NYLIFE Distributors
regardless of the amounts actually expended by NYLIFE Distributors for
distribution of the Fund's shares and service activities.
NYLIFE Distributors anticipates that its actual distribution expenditures will
substantially exceed the distribution fee received by it during the initial
years of the operation of the Plan and that in later years its expenditures may
be less than the distribution fee.
Sales Charge. The Fund was advised that the amount of sales charge retained by
NYLIFE Distributors was $154,045 for the six months ended June 30, 1997.
28
<PAGE>
Notes to Financial Statements (unaudited) continued
Trustees Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee
of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus
reimbursement for travel and out-of-pocket expenses. The Trust allocates this
expense in proportion to the net assets of the respective Funds.
Capital. At June 30, 1997, NYLIFE Securities owned shares of the Fund with a net
asset value of $280,800, which represents 0.10% of the Fund's net assets at
period end.
Other. NYLIFE Distributors has received $15,736 for providing the Fund certain
transfer agency services for the period January 1, 1997, through April 30, 1997.
Effective May 1, 1997, MainStay Shareholder Services Inc. ("MSS"), an indirect
wholly owned subsidiary of New York Life Insurance Company, was appointed
Transfer, Dividend Disbursing and Shareholder Servicing Agent. MSS was paid
$3,913 for services rendered May 1, 1997, through June 30, 1997.
Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $4,272 for the six months ended
June 30, 1997.
Note 4--Purchases and Sales of Securities (in 000's):
During the six months ended June 30, 1997, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $50,175 and $3,501, respectively.
Note 5--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Year ended
Six months ended December 31,
June 30, 1997* 1996
================ ============
<S> <C> <C>
Shares sold ..................................... 3,104 4,773
Shares issued in reinvestment of
dividends and distributions ................... -- 491
------ ------
5,264
Shares redeemed ................................. (1,018) (810)
Reduction of shares due to reverse share split .. -- (503)
------ ------
Net increase .................................... 2,086 3,951
===== =====
</TABLE>
- ----------
* Unaudited.
29
<PAGE>
MainStay Equity Index Fund
Note 6--Guarantee:
NYLIFE provides a guarantee to the effect that if, 10 years from the date of
purchase (the "Guarantee Date"), the net asset value of a unit equal to the net
asset value of a Fund share purchased, plus the value of all cumulative
reinvested dividends and distributions attributable to such share paid during
that 10-year period ("Guaranteed Share"), is less than the public offering price
initially paid for the share ("Guaranteed Amount"), NYLIFE will pay to the
transfer agent for disbursement to shareholders an amount equal to the
difference between the net asset value of each such Guaranteed Share outstanding
and held by shareholders as of the close of business on the Guarantee Date and
the Guaranteed Amount for each such share. The Fund is not a party to the
guarantee.
30
<PAGE>
This page intentionally left blank
31
<PAGE>
The MainStay Funds
<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund graph indicating of companies in expanding markets and are willing to accept a higher
risk/reward of with strong growth potential level of risk for higher return potential
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in a portfolio that tracks You seek a conservative way to partici-
EQUITY INDEX FUND graph indicating the makeup and returns of the pate in the growth potential of stocks+
risk/reward of S&P 500*
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Offers broad diversification into You prefer the higher return potential
International Equity Fund graph indicating international stock markets with of international equities or want to
risk/reward of an emphasis on risk control add diversification to your domestic
Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Fund [Horizontal bar Invests in convertible securities for You want income from securities that
graph indicating a special blend of long-term growth may offer growth potential if converted
As of 6/2/97, this Fund risk/reward of potential and dividend income into common stock
was closed to new investors. Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Balances current income with growth You seek a combination of income and
Total Return Fund graph indicating opportunities by investing in stocks, growth potential and want to manage
risk/reward of bonds, and money market instruments risk through diversification
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks undervalued stocks with You seek to maximize total return from
Value Fund graph indicating attractive dividends and a stimulus securities which may have more poten-
risk/reward of for positive change tial than the market currently sees
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's.
+ The original investment is guaranteed provided it is held for 10 years with
all dividend and capital gain distributions reinvested. If shares are
redeemed prior to or after the one-day guarantee date, the investor loses
the benefit of the guarantee with respect to those shares.
++ Investments in foreign securities may be subject to greater risks than
domestic investments. These risks include currency fluctuations, changes in
U.S. or foreign tax or currency laws, and changes in monetary policies and
economic and political conditions in foreign countries.
(S) While individual securities owned by the Government Fund may be guaranteed
by the U.S. government and its agencies, the share price of the Fund is not
guaranteed and will fluctuate with market conditions.
|| Certain of the Fund's investments may be speculative.
# Investments in the Money Market Fund are neither insured nor guaranteed by
the U.S. government and there is no assurance that the Fund will be able to
maintain a stable net asset value of $1.00 per share; investment returns
will vary with market conditions.
** A small portion of the Fund's income may be subject to state and local
taxes and the Alternative Minimum Tax. Capital gains, if any, may also be
taxed.
32
<PAGE>
INCOME FUNDS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Seeks a high level of current income You are seeking to combine high
Government Fund graph indicating consistent with safety of principal current income and safety of principal
risk/reward of primarily from U.S. government
Fund] securities(S)
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar An aggressive high-yield bond You want to maximize current income
High Yield graph indicating fund that is actively managed for and can accept the higher risk of
Corporate Bond Fund risk/reward of maximum current income|| securities with high yield potential
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current yields and You prefer the higher return potential
International Bond Fund graph indicating competitive total return from non- of international bonds or want to
risk/reward of U.S. bonds with an emphasis on add diversification to your domestic
Fund] risk control investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating stability of principal, and liquidity, competitive yields on cash you're plan-
risk/reward of with free checkwriting# ning to spend or invest in the near future
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks current income and competi- You seek to combine the return potential
Strategic Income Fund graph indicating tive overall return by investing in of high-grade, high-yield,|| and inter-
risk/reward of a diversified portfolio of domestic national bonds and want to manage risk
Fund] and foreign debt securities++ through multimarket diversification
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are a California resident and want to
California Tax Free Fund graph indicating from both federal and California keep more of what you earn by invest-
risk/reward of income taxes consistent with ing for income that's double tax free**
Fund] preservation of capital**
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are a New York State or City resident
New York Tax Free Fund graph indicating from federal, New York State, and and want to keep more of what you earn
risk/reward of New York City income taxes consis- with income that's double or triple tax
Fund] tent with preservation of capital** free**
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are in a high federal income tax
Tax Free Bond Fund graph indicating from regular federal income tax con- bracket or want to pay less of your
risk/reward of sistent with preservation of capital** investment income to the IRS
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A word about risk and reward
The "thermometers" in the tables above show how much risk the investor must
assume and the related return potential. Generally speaking, investments with
higher return potential also carry higher risks. So, the longer the indicator
bar, the higher the risk and reward potential of the Fund.
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send any money. Shares
must be offered in the investor's state of residence.
33
<PAGE>
- --------------------------------------------------------------------------------
MAINSTAY
Equity Index Fund
- --------------------------------------------------------------------------------
[GRAPHIC]
Semiannual Report
June 30, 1997
Unaudited
[LOGO] MAINSTAY(R)
FUNDS
OFFICERS & TRUSTEES
Alice T. Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
[LOGO] MAINSTAY(R) FUNDS
NYLIFE Distributors Inc.
Morris Corporate Center, Building A
300 Interpace Parkway
Parsippany, New Jersey 07054
Administrator & Distributor of The MainStay Funds
http://www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly owned subsidiary of
New York Life Insurance Company.
[LOGO] NEW YORK LIFE
This report is provided for the information of shareholders of the MainStay
Equity Index Fund. It may be given to others only when preceded or accompanied
by an effective MainStay Funds prospectus. This report does not offer to sell
any securities or solicit orders to buy them.
(C)1997. All rights reserved. MSSA07-08/97
[GRAPHIC]
<PAGE>
Table of Contents
Chairperson's Letter 2
MainStay Government Fund Highlights 4
$10,000 Invested in the MainStay
Government Fund versus Lehman Brothers
Government Bond Index and Inflation--
Class A & Class B Shares 5
Portfolio Management Discussion and Analysis 6
Year-by-Year & Six-Month Performance 7
Portfolio Composition 8
Returns & Lipper Rankings 10
Portfolio of Investments 11
Unaudited Financial Statements 13
Notes to Financial Statements 17
The MainStay Funds 22
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
Chairperson's Letter
After a remarkable six-year period of expansion, the U.S. economy continued to
grow throughout the first half of 1997. For most investors, the overall impact
was positive, but there were some rough seas along the way.
As the stock market made gains early in the year, concerns about the possibility
of impending inflation brought increased price volatility. In late March, the
Federal Reserve Board moved to raise interest rates in an effort to slow
economic growth. Although this preemptive strike helped keep inflation in check,
the initial reaction from both the stock and bond markets was negative. As a
result, bond prices faltered and stocks tumbled more than 9% from their peak
before both markets began to stabilize.
As employment figures, earnings estimates, and other indicators began to suggest
that economic growth was slowing in the second quarter, the stock market not
only recovered lost ground, but soared to record highs. With higher valuations,
however, the market became increasingly volatile, reacting severely to any news
that could signal a shift in buying patterns or interest rates.
Positive performance, emerging concerns
Despite the volatility, domestic stock and bond markets closed the first half of
1997 with positive returns. While Malaysia and Singapore had negative results,
most international markets performed well. Given these results, many investors
are once again celebrating their good fortune. The underlying volatility,
however, should serve to remind us that the level of growth we've enjoyed for
more than six years is not typical market behavior.
Certainly no one can predict what will happen next, so it's important to keep
recent performance in perspective. We believe that having realistic
expectations, as well as a long-range plan and diversified investments can help
you work toward achieving your goals, wherever the markets may move.
Solid team approach
At MainStay(R), we believe our risk-averse approach can help provide reassurance
to many investors, particularly in uncertain times. Each MainStay Fund is
managed by a team of experienced professionals who employ disciplined investment
strategies to seek competitive returns with careful attention to downside risk.
Our team approach offers investors a combination of experience, insight, and
market perspective that few individuals could provide on their own. It also
helps provide important checks and balances in security selection, market
evaluation, and overall accountability.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
Our Fund managers believe that strong companies tend to get stronger in up
markets and perform better than average when the markets go down. Using
selection criteria appropriate to the individual Funds they manage, they may
look for specific catalysts that are likely to stimulate growth, enhance value,
or increase yield without taking on unnecessary risk.
Looking forward
As we move into the second half of 1997, we expect that an intensified focus on
inflation, interest rates, and corporate earnings will account for much of the
momentum driving the market. Regardless of how events unfold, you can be
confident that we will hold true to our disciplined management approach.
At MainStay, we believe that having a close relationship with your Registered
Representative is one of the best ways to keep your long-term focus in any
market environment. Therefore, we urge you to speak with your Registered
Representative regularly--whether the market happens to be up or down--so he or
she can understand your needs and help keep you on a steady course.
While we've seen positive results for the first half of the year, we remain
somewhat cautious. Whatever the future brings, we'll continue to provide the
information, service, and support you can consider when making decisions--and
the prudent management you depend on to pursue your long-range goals.
Sincerely,
/s/ Alice T. Kane
Alice T. Kane
July 1997
- --------------------------------------------------------------------------------
3
<PAGE>
MainStay Government Fund Highlights
MARKET HIGHLIGHTS
FOR THE 6 MONTHS ENDED 6/30/97
- --------------------------------------------------------------------------------
o In general, the market for income securities was relatively quiet during
the first half of 1997.
o Rapid economic growth in the first quarter led to a 25 basis point increase
in the Federal Funds rate in late March.
o Economic activity, along with low unemployment and low inflation, kept
bonds trading in a relatively narrow range.
o With lower volatility, the market's attention moved from Treasuries to
other ways of enhancing yield such as mortgage-backed and asset-backed
securities.
- --------------------------------------------------------------------------------
Fund Highlights for the
6- and 12-month Periods Ended 6/30/97
- --------------------------------------------------------------------------------
o One-year total returns of 6.78% and 6.17% for Class A shares and Class B
shares, respectively, excluding all sales charges, as of 6/30/97.
o The Fund sold Treasuries and invested in other securities, including
mortgage-backed bonds, unleveraged collateralized mortgage obligations
(CMOs), whole loans, low-balance mortgage loans, and other instruments that
we believed offered opportunities to enhance yield.
o Given the market's lower volatility, the Fund maintained a relatively
neutral duration throughout the first six months of the year.
o Both share classes underperformed the average Lipper* general U.S.
government fund for the first half of 1997.
- --------------------------------------------------------------------------------
- ----------
* See footnote + and table on page 10 for more information on Lipper
Analytical Services, Inc.
4
<PAGE>
$10,000 Invested in the MainStay
Government Fund versus Lehman Brothers
Government Bond Index and Inflation
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Lehman Bothers
Government Government Bond
Period-end Fund Index* Inflation+
---------- ---------- --------------- ----------
<S> <C> <C> <C>
5/1/86 $ 9,550.00 $10,000.00 $10,000.00
12/86 $10,115.00 $10,567.00 $10,193.00
12/87 $10,471.80 $10,799.00 $10,644.00
12/88 $11,142.30 $11,559.00 $11,113.00
12/89 $12,498.70 $13,203.00 $11,629.00
12/90 $13,363.80 $14,355.00 $12,355.00
12/91 $15,154.70 $16,554.00 $12,724.00
12/92 $15,733.20 $17,751.00 $13,100.00
12/93 $16,658.10 $19,643.00 $13,459.00
12/94 $16,183.70 $18,979.00 $13,809.00
12/95 $18,834.50 $22,460.00 $14,168.00
12/96 $19,205.00 $23,082.00 $14,637.00
6/97 $19,659.00 $23,690.00 $14,738.00
</TABLE>
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Lehman Bothers
Government Government Bond
Period-end Fund Index* Inflation+
---------- ---------- --------------- ----------
<S> <C> <C> <C>
5/1/86 $10,000.00 $10,000.00 $10,000.00
12/86 $10,591.60 $10,567.00 $10,193.00
12/87 $10,965.20 $10,799.00 $10,644.00
12/88 $11,667.30 $11,559.00 $11,113.00
12/89 $13,087.60 $13,203.00 $11,629.00
12/90 $13,993.50 $14,355.00 $12,355.00
12/91 $15,868.80 $16,554.00 $12,724.00
12/92 $16,474.60 $17,751.00 $13,100.00
12/93 $17,443.00 $19,643.00 $13,459.00
12/94 $16,946.30 $18,979.00 $13,809.00
12/95 $19,605.70 $22,460.00 $14,168.00
12/96 $19,851.70 $23,082.00 $14,637.00
6/97 $20,271.00 $23,690.00 $14,738.00
</TABLE>
- ----------
The Class A graph assumes an initial investment of $10,000 made on 5/1/86
reflecting the effect of the 4.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,550 and includes the historical
performance of the Class B shares for periods from inception (5/1/86)
through 12/31/94. The Class B graph assumes an initial investment of
$10,000 made on 5/1/86. Returns shown do not reflect the Contingent
Deferred Sales Charge (CDSC), as it would not apply for the period shown.
All results include reinvestment of distributions at net asset value and
the change in share price for the stated period. Past performance is no
guarantee of future results.
* The Lehman Brothers Government Bond Index includes issues of the U.S.
government and agencies thereof, as well as fixed-rate debt issues that are
rated investment-grade by Moody's, Standard & Poor's, or Fitch, in that
order, with at least one year to maturity. The Index is unmanaged and
results assume the reinvestment of all income and capital gain
distributions.
+ Inflation is represented by the Consumer Price Index (CPI), which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.
[GRAPHIC]
5
<PAGE>
Portfolio Management Discussion and Analysis
The first six months of 1997 were relatively quiet in the U.S. government
securities markets. Although strong economic growth led to a tightening of the
----------
Federal Funds rate in late March, the markets had largely discounted the move
before it happened, and whatever losses resulted from the rising rates were
regained by the end of the second quarter.
After a strong period of growth in the first quarter, the second quarter showed
modest growth, low inflation, and the lowest unemployment levels in over a
decade. As a result, the Treasury market traded in a narrow range.
Today, many income securities give issuers or bond holders some flexibility in
how the security will perform, through puts, calls, or prepayments. As
volatility decreased, the market directed its attention to agencies,
mortgage-backed and asset-backed securities, and collateralized mortgage
obligations (CMOs), which offer the potential to earn higher yields. The result
was a decreased demand for Treasuries, yield spreads tightening to Treasuries,
and increasing interest in identifying market inefficiencies.
Given this context, how did the MainStay Government Fund do in the first half of
1997?
The Fund returned 2.36% and 2.11% for Class A shares and Class B shares,
respectively, excluding all sales charges, for the six months ended 6/30/97.
Both share classes underperformed the average Lipper* general U.S. government
fund, which returned 2.47% for the same period.
What was your primary strategy during the reporting period?
We sought to enhance yields, since there were few opportunities among Treasuries
and, given the flatness of the yield curve for this stage of the cycle, there
-----------
were not many opportunities to take advantage of in the yield curve. We
maintained a relatively neutral duration for the Fund and sought yield among a
--------
variety of securities that offered yield spreads to Treasuries.
-------------
Where did you find the best opportunities?
We sold some Treasuries and moved into mortgage-backed securities. The Fund's
domestic mortgage-backed holdings reached as much as 50% of its overall
investment portfolio during the second quarter. We've since taken some profits,
paring the Fund's holdings back to about 40%.
What types of mortgage-related securities did you buy?
During the reporting period, we purchased seasoned mortgage pools at a discount,
which provided capital gain opportunities when prepayments came in higher than
expectations. We also invested the Fund in government-guaranteed adjustable-rate
mortgages both in the first and second quarter. We feel these are the most
undervalued securities in the short end of the market. And while they performed
-----------------------
pretty much in line with Treasuries, we believe that they may begin to
outperform in the second half of the year. So we feel that building the Fund's
position in these securities can offer total return potential.
[GRAPHIC]
Easing/Tightening
- -----------------
When the Federal Reserve Board lowers interest rates on benchmark securities, it
is said to be "easing" or making borrowing more affordable. When it raises
interest rates, it is said to be "tightening" or making borrowing more
expensive.
Yield curve
- -----------
When interest rates available from various short-, intermediate-, and long-term
securities are plotted on a graph, the resulting line is known as a yield curve.
Duration
- --------
A measure of price sensitivity, which adjusts for the time value of the payments
investors will receive and which takes into account interest payments as well as
principal payments. Duration is a better gauge of interest-rate sensitivity than
average maturity alone.
- ----------
* See footnote and table on page 10 for more information on Lipper Analytical
Services, Inc.
6
<PAGE>
YEAR-BY-YEAR & SIX-MONTH PERFORMANCE
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period-end Total Return %
- --------------------------------------------------------------------------------
<S> <C>
12/86 5.92
12/87 3.53
12/88 6.40
12/89 12.17
12/90 6.92
12/91 13.40
12/92 3.81
12/93 5.88
12/94 -2.85
12/95 16.38 Class A
12/95 15.69 Class B
12/96 1.97 Class A
12/96 1.25 Class B
6/97 2.36 Class A
6/97 2.11 Class B
</TABLE>
- ----------
Returns are for Class B shares unless otherwise noted. See footnote * on page 10
for more information on performance.
We also increased the Fund's holdings in unleveraged CMOs from 9% to 17%. We
also pared back on those when we saw opportunities to take profits. CMOs
accounted for about 12% of the Fund's investment portfolio at the end of June
and both mortgage strategies helped increase yield in a low-volatility
environment.
What was your duration strategy for the Fund during the first six months of the
year?
We kept the Fund neutral. We correctly anticipated the Federal Reserve Board's
tightening move and so did the rest of the market. Although prices dropped a bit
afterward, there haven't been any major trends in this low-volatility market.
Prices and yields have ended the first half of 1997 near levels where they
started the year.
Couldn't you seek to enhance yield by lowering the Fund's quality?
We could, but we won't. The Fund continues to be agency rated,+ which is the
highest rating the Fund can have--better than AAA. In a market with spreads this
tight, we don't believe there is any reason to compromise quality to pick up a
few basis points in yield here or there.
------------
Were there other yield-enhancing securities that you bought for the Fund?
We purchased some low-balance mortgage loans. These securities are typically
backed by smaller nonconforming, limited-documentation mortgages to top-quality
self-employed individuals. These securities carry the highest quality ratings.
On average, the borrowers pay approximately 100 basis points over standard
mortgages. This is why the securities are attractive.
Are these relatively new securities?
Yes they are. And we believe we've been at the forefront of this market. Our
original research included modeling prepayments, projecting refinancing levels,
and developing a demographic and geographic profile. We've capitalized on our
in-house experience to establish ourselves as a prominent player in this market.
[GRAPHIC]
Yield spread
- ------------
The difference in yield between securities in different market sectors, such as
government and mortgage-backed securities--or between different securities in a
single sector, such as 5- and 10-year Treasuries.
Short end of the market
- -----------------------
The maturities of income securities may range from as short as overnight to as
long as 30-years or more. Securities with shorter maturities represent the
"short end" of the market or maturity spectrum.
Basis point
- -----------
One hundredth of one percent in the yield of an investment, i.e., 100 basis
points equals 1%.
- ----------
+ Agency rating is above AAA. Currently debt rated AAA has the highest rating
assigned by Standard & Poor's. These ratings are based solely on the
creditworthiness of the bonds in the portfolio and are not meant to represent
the stability or safety of the Fund.
7
<PAGE>
PORTFOLIO COMPOSITION AS OF 6/30/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
Percentage
- --------------------------------------------------------------------------------
<S> <C>
U.S. Treasury Notes 7.0%
U.S. Treasury Bonds 28.1%
Federal National Mortgage Association 20.5%
Government National Mortgage Association 26.3%
Asset-Backed Securities 15.9%
Mortgage-Backed Securities 12.1%
Cash, Equivalents & Other Assets,
less Liabilities -9.9%
</TABLE>
- ----------
Actual percentages will vary over time.
Since these are high-coupon mortgages, they're issued at a premium. The biggest
risk they face is prepayment risk. But since the mortgage holders are paying a
---------------
premium to get the loans and don't have many financing alternatives, we believe
we'll see slower prepayments than the market expects. We're very comfortable
with these new securities and we believe they can provide attractive
opportunities for the Fund.
Did the Fund invest in asset-backed securities?
Yes. We increased the Fund's exposure to asset-backed securities, which also
offer a spread over Treasuries. Basically, we concentrated on AAA-rated
manufactured-housing mortgages and AAA-rated home equity loans. They provided
the Fund with increased yield in the short end of its investment portfolio.
Can you comment on the Fund's Treasury holdings?
The Treasury market was very efficient during the reporting period. Given the
reduced budget deficit, the need for new cash to finance the deficit has
decreased. As a result, the extra 10-year auctions that were announced last year
--------
were canceled. During the first half of 1997, inflation-indexed Treasury
securities were introduced to the market. While these securities may be a good
idea, we think they came at a bad time. With inflation at such low levels, there
was little interest in them and they underperformed. Fortunately, we did not
participate in these new offerings.
We did buy some high-coupon callable paper that we think is attractive right
now. The securities are yielding a little over 10-year Treasuries and we think
that spreads will tighten over the course of the next six months.
What's your outlook going forward?
We expect more of the same. The Federal Reserve Board has been very strict on
inflation, and we expect that to continue. As long as productivity increases
faster than wages, we don't anticipate any major infla-
[GRAPHIC]
Prepayment risk
- ---------------
The risk that mortgage or loan holders will repay their obligations before they
mature, shortening the stream of interest payments investors receive.
Auction
- -------
The competitive bidding process through which Treasury securities are sold.
8
<PAGE>
tionary problems on the horizon. Whatever the future brings, we'll continue to
apply our disciplined approach to sector evaluation and individual security
selection on behalf of the Fund's shareholders. As always, we'll continue to
seek a high level of current income, consistent with safety of principal.
Ravi Akhoury
Edward Munshower
Portfolio Managers
[GRAPHIC]
9
<PAGE>
Returns & Lipper Rankings as of 6/30/97
Fund average annual total returns*
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Life of Fund
1 year 5 years 10 years through 6/30/97
<S> <C> <C> <C> <C>
Class A 6.78% 5.14% 6.74% 6.67%
Class B 6.17% 4.82% 6.57% 6.53%
- -----------------------------------------------------------------------------------------------------
<CAPTION>
Fund SEC returns*
- -----------------------------------------------------------------------------------------------------
Life of Fund
1 year 5 years 10 years through 6/30/97
<S> <C> <C> <C> <C>
Class A 1.98% 4.18% 6.24% 6.24%
Class B 1.17% 4.48% 6.57% 6.53%
- -----------------------------------------------------------------------------------------------------
<CAPTION>
Fund Lipper+ rankings & Lipper category returns as of 6/30/97
- -----------------------------------------------------------------------------------------------------
Life of Fund
1 year 5 years 10 years through 6/30/97
<S> <C> <C> <C> <C>
Class A 115 out of n/a n/a n/a
177 funds
Class B 152 out of 69 out of 43 out of 29 out of
177 funds 77 funds 49 funds 36 funds
Average Lipper
general U.S.
government fund 7.01% 5.98% 7.41% 7.22%
- -----------------------------------------------------------------------------------------------------
<CAPTION>
Fund per share net asset values & distributions for the six months ended 6/30/97
- -----------------------------------------------------------------------------------------------------
NAV 6/30/97 Income Capital Gains
<S> <C> <C> <C>
Class A $8.00 $0.2460 $0.0000
Class B $7.99 $0.2160 $0.0000
- -----------------------------------------------------------------------------------------------------
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested.
Class A shares, first offered to the public on 1/3/95, are sold with a
maximum initial sales charge of 4.5% and an annual 12b-1 fee of .25%.
Performance figures for this class include the historical performance of
the Class B shares for periods from inception (5/1/86) up to 12/31/94.
Performance data for the two classes after this date vary based on
differences in their expense structures. Class B shares of the Fund are
sold with no initial sales charge, but are subject to a maximum CDSC of up
to 5% if shares are redeemed during the first 6 years of purchase and an
annual 12b-1 fee of up to 1%.
+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales
charges. Lipper averages listed above are not class specific. Life of Fund
return is from the period of the Class B shares' initial offering through
6/30/97. The Fund's Class A shares were first offered to the public on
1/3/95; Class B shares on 5/1/86.
[GRAPHIC]
10
<PAGE>
Portfolio of Investments June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
Principal
Amount Value
===========================
<S> <C> <C>
LONG-TERM INVESTMENTS (109.9%)+
ASSET-BACKED SECURITIES (15.9%)
AIRCRAFT LEASES (3.5%)
Airplanes Pass-Through Trust
Series 1- Class C
8.15%, due 3/15/19 ...................... $23,405,000 $ 24,365,073
------------
AUTO LEASES (0.8%)
Advanta Automobile Receivables Trust
Series 1997-1 Class A2
6.75%, due 12/15/03 ..................... 5,190,000 5,214,341
------------
CONSUMER LOANS (3.5%)
Green Tree Recreational Equipment &
Consumer Trust
Series 1996-C Class A1
5.93%, due 10/15/17 (a) ................. 3,244,024 3,247,074
Series 1997-B Class A1
6.55%, due 7/15/28 ...................... 21,135,000 21,085,332
------------
24,332,406
------------
EQUIPMENT LOANS (2.5%)
Case Equipment Loan Trust
Series 1997-A Class A3
6.45%, due 3/15/04 ...................... 17,600,000 17,635,024
------------
HOME EQUITY LOANS (2.8%)
Southern Pacific Secured Assets Corp.
Series 1997-1 Class A1
5.89%, due 4/25/27 (a) .................. 19,286,910 19,262,802
------------
MANUFACTURED HOUSING LOANS (2.1%)
Green Tree Financial Corp.
Series 1997-3 Class A2
6.49%, due 7/15/28 ...................... 8,200,000 8,236,818
Series 1997-4 Class A7
7.36%, due 2/15/29 ...................... 6,480,000 6,415,200
------------
14,652,018
------------
STUDENT LOANS (0.7%)
Nellie Mae
Series 1996-a Class A1
5.86%, due 12/15/04 (a) ................. 5,032,911 5,039,202
------------
Total Asset-Backed Securities
(Cost $110,224,595) ..................... 110,500,866
------------
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
<TABLE>
<CAPTION>
Principal
Amount Value
===========================
<S> <C> <C>
MORTGAGE-BACKED SECURITIES (12.1%)
COMMERCIAL MORTGAGE LOANS (COLLATERALIZED
MORTGAGE OBLIGATIONS) (5.1%)
Asset Securitization Corp.
Series 1996-MD6 Class A1B
6.88%, due 11/13/26 ..................... $13,295,000 $ 13,308,561
Series 1997-MD7 Class A1B
7.41%, due 1/13/30 ...................... 6,900,000 7,085,472
Series 1997-D4 Class A1D
7.49%, due 4/14/29 ...................... 14,500,000 14,961,100
------------
35,355,133
------------
FIRST MORTGAGE LOANS (COLLATERALIZED
MORTGAGE OBLIGATIONS) (7.0%)
Bear Stearns Mortgage Securities Inc.
Series 1996-5 Class A2
10.00%, due 9/15/27 ..................... 3,865,235 4,015,322
Series 1996-4 Class AI2
10.50%, due 9/25/27 ..................... 3,353,707 3,512,873
Residential Accredit Loans, Inc.
Series 1997-QS4 Class A4
10.00%, due 5/25/27 ..................... 5,219,617 5,527,470
Series 1997-QS5 Class A3
10.00%, due 6/25/27 ..................... 8,265,817 8,729,447
Series 1997-QS1 Class A6
11.00%, due 2/25/27 ..................... 8,639,622 9,424,272
Residential Asset Securitization Trust
Series 1997-A3 Class A7
10.00%, due 5/25/27 ..................... 7,671,867 8,083,923
Series 1997-A5 Class A4
10.00%, due 7/25/27 ..................... 4,782,710 5,033,802
Structured Asset Securities Corporation
Series 1996-2 Class A1
7.00%, due 8/25/26 ...................... 4,025,000 4,048,265
------------
48,375,374
------------
Total Mortgage-Backed Securities
(Cost $88,568,799) ...................... 83,730,507
------------
U.S. GOVERNMENT & FEDERAL AGENCIES (81.9%)
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (MORTGAGE PASS-
THROUGH SECURITIES) (20.5%)
(zero coupon), due 7/11/97-7/14/97 ...... 57,770,000 57,656,062
6.52%, due 12/1/03 (b) .................. 5,698,977 5,620,160
6.55%, due 1/1/04 (b) ................... 5,617,650 5,560,519
6.80%, due 1/1/04 (b) ................... 8,788,502 8,788,502
7.50%, due 7/14/27 TBA (c) .............. 64,485,000 64,670,717
------------
142,295,960
------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
<PAGE>
MainStay Government Fund
<TABLE>
<CAPTION>
Principal
Amount Value
===========================
<S> <C> <C>
U.S. GOVERNMENT & FEDERAL AGENCIES (Continued)
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION I (MORTGAGE PASS-
THROUGH SECURITIES) (14.2%)
6.50%, due 12/15/23 (b) ................. $20,983,050 $ 20,235,634
7.00%, due 5/15/27 ...................... 28,957,252 28,590,653
7.50%, due 7/25/27 TBA (c) .............. 8,500,000 8,566,470
9.50%, due 12/15/17- 5/15/22 (b) ........ 38,264,884 41,501,264
------------
98,894,021
------------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION II (MORTGAGE PASS-
THROUGH SECURITIES) (12.1%)
6.875%, due 10/20/22 ARM (b)(d) ......... 10,592,529 10,903,738
7.125%, due 6/20/23 - 6/20/25
ARM (b)(d) .............................. 71,036,668 72,972,422
------------
83,876,160
------------
UNITED STATES TREASURY BONDS (28.1%)
6.25%, due 8/15/23 (e) .................. 34,711,000 32,134,750
6.625%, due 2/15/27 (e) ................. 67,110,000 65,663,108
8.875%, due 8/15/17 (e) ................. 30,332,000 36,943,466
11.25%, due 2/15/15 ..................... 5,085,000 7,384,386
12.00%, due 8/15/13 (e) ................. 37,875,000 53,315,122
------------
195,440,832
------------
UNITED STATES TREASURY NOTES (7.0%)
5.50%, due 11/15/98 (e) ................. 22,075,000 21,943,874
6.25%, due 2/28/02 (e) .................. 17,710,000 17,610,293
8.125%, due 2/15/98 (e) ................. 8,875,000 9,003,954
------------
48,558,121
------------
Total U.S. Government &
Federal Agencies
(Cost $566,894,538) ..................... 569,065,094
------------
Total Investments
(Cost $760,507,438) (f) ................. 109.9% 763,296,467(g)
Liabilities in Excess of Cash
and Other Assets ........................ (9.9) (68,508,143)
----- ------------
Net Assets ................................ 100.0% $694,788,324
===== ============
</TABLE>
- ----------
(a) Floating rate. Rate shown is the rate in effect at June 30, 1997.
(b) Segregated or partially segregated as collateral for TBA.
(c) TBA: Securities purchased on a forward commitment basis with an approximate
principal amount and maturity date. The actual principal amount and the
maturity will be determined upon settlement.
(d) ARM--Adjustable Rate Mortgage. Resets annually.
(e) Represents securities out on loan or a portion of which is out on loan.
(f) The cost for Federal income tax purposes is $765,524,296.
(g) At June 30, 1997, net unrealized depreciation was $2,227,829, based on cost
for Federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $4,754,567 and aggregate unrealized depreciation
of all investments on which there was an excess of cost over market value
of $6,982,396.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE>
Statement of Assets and Liabilities as of June 30, 1997 (unaudited)
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $760,507,438) ..... $ 763,296,467
Cash .................................................................. 3,389
Receivables:
Investment securities sold .......................................... 15,601,069
Interest ............................................................ 8,105,891
Fund shares sold .................................................... 236,834
-------------
Total assets ...................................................... 787,243,650
-------------
LIABILITIES:
Payables:
Investment securities purchased ..................................... 87,632,388
NYLIFE Distributors ................................................. 619,061
Fund shares redeemed ................................................ 541,573
Adviser ............................................................. 173,548
Transfer agent ...................................................... 142,779
Custodian ........................................................... 5,921
Trustees ............................................................ 5,772
Accrued expenses ...................................................... 194,530
Dividend payable ...................................................... 3,139,754
-------------
Total liabilities ................................................. 92,455,326
-------------
Net assets ............................................................ $ 694,788,324
=============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A ............................................................. $ 21,623
Class B ............................................................. 847,527
Additional paid-in capital ............................................ 837,747,672
Accumulated undistributed net investment income ....................... 1,854,909
Accumulated net realized loss on investments .......................... (148,472,436)
Net unrealized appreciation on investments ............................ 2,789,029
-------------
Net assets ............................................................ $ 694,788,324
=============
CLASS A
Net assets applicable to outstanding shares ........................... $ 17,302,140
=============
Shares of beneficial interest outstanding ............................. 2,162,322
=============
Net asset value per share outstanding ................................. $ 8.00
Maximum sales charge (4.50% of offering price) ........................ 0.38
-------------
Maximum offering price per share outstanding .......................... $ 8.38
=============
CLASS B
Net assets applicable to outstanding shares ........................... $ 677,486,184
=============
Shares of beneficial interest outstanding ............................. 84,752,739
=============
Net asset value and offering price per share outstanding .............. $ 7.99
=============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
Statement of Operations for the six months ended June 30, 1997 (unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Interest .................................................. $ 27,690,261
------------
Expenses:
Distribution--Class B ..................................... 1,919,293
Administration ............................................ 1,101,627
Advisory .................................................. 1,101,627
Service ................................................... 918,022
Transfer agent ............................................ 632,190
Shareholder communication ................................. 96,568
Recordkeeping ............................................. 54,119
Custodian ................................................. 41,000
Professional .............................................. 34,198
Registration .............................................. 24,810
Trustees .................................................. 10,538
Miscellaneous ............................................. 2,388
------------
Total expenses .......................................... 5,936,380
------------
Net investment income ....................................... 21,753,881
------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on investments ............................ (6,478,017)
Net change in unrealized appreciation on investments ........ (253,247)
------------
Net realized and unrealized loss on investments ............. (6,731,264)
------------
Net increase in net assets resulting from operations ........ $ 15,022,617
============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six months
ended Year ended
June 30, December 31,
1997* 1996
=============== ===============
<S> <C> <C>
DECREASE IN NET ASSETS:
Operations:
Net investment income ........................................................ $ 21,753,881 $ 50,252,534
Net realized loss on investments ............................................. (6,478,017) (18,412,508)
Net change in unrealized appreciation on investments ......................... (253,247) (24,606,272)
--------------- ---------------
Net increase in net assets resulting from operations ......................... 15,022,617 7,233,754
--------------- ---------------
Dividends to shareholders:
From net investment income:
Class A .................................................................... (517,857) (979,480)
Class B .................................................................... (19,381,115) (49,047,447)
--------------- ---------------
Total dividends to shareholders .......................................... (19,898,972) (50,026,927)
--------------- ---------------
Capital share transactions:
Net proceeds from sale of shares:
Class A .................................................................... 5,138,371 10,249,736
Class B .................................................................... 23,767,873 69,491,869
Net asset value of shares issued to shareholders in reinvestment of dividends:
Class A .................................................................... 294,949 672,638
Class B .................................................................... 12,187,987 36,261,617
--------------- ---------------
41,389,180 116,675,860
Cost of shares redeemed:
Class A .................................................................... (4,446,193) (6,715,743)
Class B .................................................................... (136,661,651) (270,751,384)
--------------- ---------------
Decrease in net assets derived from capital share transactions ........... (99,718,664) (160,791,267)
--------------- ---------------
Net decrease in net assets ............................................... (104,595,019) (203,584,440)
NET ASSETS:
Beginning of period ............................................................ 799,383,343 1,002,967,783
--------------- ---------------
End of period .................................................................. $ 694,788,324 $ 799,383,343
=============== ===============
Accumulated undistributed net investment income ................................ $ 1,854,909 $ --
=============== ===============
</TABLE>
- ----------
* Unaudited.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A Class B Class A Class B Class A Class B
====== ====== ====== ====== ====== ======
Six months ended Year ended Year ended
June 30, 1997* December 31, 1996 December 31, 1995
================= ================= ==================
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ..... $ 8.06 $ 8.04 $ 8.41 $ 8.41 $ 7.76 $ 7.76
------ ------ ------ ------ ------ ------
Net investment income ..... 0.26 0.24 0.50 0.46 0.58 0.54
Net realized and
unrealized gain (loss)
on investments .......... (0.07) (0.07) (0.35) (0.37) 0.65 0.65
------ ------ ------ ------ ------ ------
Total from investment
operations .............. 0.19 0.17 0.15 0.09 1.23 1.19
------ ------ ------ ------ ------ ------
Less dividends and
distributions:
From net investment
income .................. (0.25) (0.22) (0.50) (0.46) (0.58) (0.54)
In excess of net
investment income ....... -- -- -- -- (0.00)(b) (0.00)(b)
Return of capital ......... -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total dividends and
distributions ........... (0.25) (0.22) (0.50) (0.46) (0.58) (0.54)
------ ------ ------ ------ ------ ------
Net asset value at end
of period ............... $ 8.00 $ 7.99 $ 8.06 $ 8.04 $ 8.41 $ 8.41
====== ====== ====== ====== ====== ======
Total investment return (a) 2.36% 2.11% 1.97% 1.25% 16.38% 15.69%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income ............. 6.45%+ 5.91%+ 6.3% 5.7% 7.3% 6.7%
Expenses ............ 1.09%+ 1.63%+ 1.0% 1.6% 1.0% 1.7%
Portfolio turnover rate ... 150% 150% 307% 307% 540% 540%
Net assets at end of
period (in 000's) ....... $17,302 $677,486 $16,413 $782,970 $12,784 $990,184
</TABLE>
<TABLE>
<CAPTION>
Class B
===================================================
September 1
through Year ended August 31
December 31 =================================
1994** 1994 1993 1992
====== ====== ====== ======
<S> <C> <C> <C> <C>
Net asset value at
beginning of period ..... $ 8.04 $ 8.77 $ 8.88 $ 8.82
------ ------ ------ ------
Net investment income ..... 0.19 0.57 0.68 0.73
Net realized and
unrealized gain (loss)
on investments .......... (0.29) (0.71) (0.09) 0.07
------ ------ ------ ------
Total from investment
operations .............. (0.10) (0.14) 0.59 0.80
------ ------ ------ ------
Less dividends and
distributions:
From net investment
income .................. (0.18) (0.57) (0.70) (0.74)
In excess of net
investment income ....... -- (0.01) -- --
Return of capital ......... -- (0.01) -- --
------ ------ ------ ------
Total dividends and
distributions ........... (0.18) (0.59) (0.70) (0.74)
------ ------ ------ ------
Net asset value at end
of period ............... $ 7.76 $ 8.04 $ 8.77 $ 8.88
====== ====== ====== ======
Total investment return (a) (1.24%) (1.63%) 6.92% 9.46%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income ............. 7.1%+ 7.1% 7.8% 8.3%
Expenses ............ 1.7%+ 1.7% 1.7% 1.8%
Portfolio turnover rate ... 143% 491% 629% 613%
Net assets at end of
period (in 000's) ....... $1,024,492 $1,119,586 $1,210,998 $957,010
</TABLE>
- ----------
* Unaudited.
** The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is not
annualized.
(b) Less than one cent per share.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE>
Notes to Financial Statements (unaudited)
Note 1--Organization and Business:
The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business
Trust. The Trust is registered under the Investment Company Act of 1940, as
amended, (the "Act") as an open-end management investment company and is
comprised of fourteen funds. These financial statements and notes relate only to
MainStay Government Fund (the "Fund").
The Fund currently offers two classes of shares. Class A shares, whose
distribution commenced on January 3, 1995, are offered at net asset value per
share plus an initial sales charge. Class B shares are offered without an
initial sales charge, although a declining contingent deferred sales charge may
be imposed on redemptions made within six years of purchase. Class A shares and
Class B shares bear the same voting (except for issues that relate solely to one
class), dividend, liquidation and other rights and conditions except that the
Class B shares are subject to higher distribution fee rates. Each class of
shares bears distribution and/or service fee payments under a distribution plan
pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The Fund's investment objective is to seek a high level of current income,
consistent with safety of principal.
Note 2--Significant Accounting Policies:
The following is a summary of significant accounting policies followed by the
Fund:
Valuation of Fund Shares. The net asset value per share of each class of shares
is calculated on each day the New York Stock Exchange (the "Exchange") is open
for trading as of the close of regular trading on the Exchange. The net asset
value per share of each class of shares is determined by taking the assets
attributable to a class of shares, subtracting the liabilities attributable to
that class, and dividing the result by the outstanding shares of that class.
Securities Valuation. Portfolio securities of the Fund are stated at value
determined (a) by appraising debt securities at prices supplied by a pricing
agent selected by the Adviser, whose prices reflect broker/dealer supplied
valuations and electronic data processing techniques if those prices are deemed
by the Adviser to be representative of market values at the regular close of
business of the New York Stock Exchange, (b) by appraising options and futures
contracts at the last sale price on the market where such options or futures are
principally traded, and (c) by appraising all other securities and other assets,
including debt securities for which prices are supplied by a pricing agent but
are not deemed by the Adviser to be representative of market values, but
excluding money market instruments with a remaining maturity of sixty days or
less and including restricted securities and securities for which no market
quotations are available, at fair value in accordance with procedures approved
by the Trustees. Short-term securities which mature in more than 60 days are
valued at current market quotations. Short term securities which mature in 60
days or less are valued at amortized cost if their term to maturity at purchase
was 60 days or less, or by amortizing the difference between market value on the
61st day prior to maturity and value on maturity date if their original term to
maturity at purchase exceeded 60 days.
17
<PAGE>
MainStay Government Fund
Events affecting the values of certain portfolio securities that occur between
the close of trading on the principal market for such securities and the regular
close of the New York Stock Exchange will not be reflected in the Fund's
calculation of net asset value unless the Adviser believes that the particular
event would materially affect net asset value, in which case an adjustment would
be made.
Mortgage Dollar Rolls. The Fund enters into mortgage dollar roll transactions
("MDRs") in which it sells mortgage-backed securities ("MBS") from its portfolio
to a counterparty from whom it simultaneously agrees to buy a similar security
on a delayed delivery basis. The MDR transactions of the Fund are classified as
purchase and sale transactions. The securities sold in connection with the MDRs
are removed from the portfolio and a realized gain or loss is recognized. The
securities the Fund has agreed to acquire are included at market value in the
portfolio of investments and liability for such purchase commitments is included
as payables for investments purchased. The Fund maintains a segregated account
with its custodian containing securities from its portfolio having a value not
less than the repurchase price, including accrued interest. MDR transactions
involve certain risks, including the risk that the MBS returned to the Fund at
the end of the roll, while substantially similar, could be inferior to what was
initially sold to the counterparty.
Securities Lending. The Fund may lend its securities to broker-dealers and
financial institutions. The loans are secured by collateral at least equal at
all times to the market value of the securities loaned. The Fund may bear the
risk of delay in recovery of, or loss of rights in, the securities loaned should
the borrower of the securities fail financially. The Fund receives compensation
for lending its securities in the form of fees or it retains a portion of
interest on the investment of any cash received as collateral. The Fund also
continues to receive interest and dividends on the securities loaned and any
gain or loss in the market price of the securities loaned that may occur during
the term of the loan will be for the account of the Fund.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Dividends and Distributions to Shareholders. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
monthly. Income dividends and capital gain distributions are determined in
accordance with Federal income tax regulations which may differ from generally
accepted accounting principles.
Security Transactions and Investment Income. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method and include gains
and losses from repayments of principal on mortgage backed securities. Interest
income is accrued daily except when collection is not expected. Discounts on
securities purchased for the Fund are accreted on the constant yield method over
the life of the respective securities.
Expenses. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when allocations of direct expenses can otherwise fairly be
made. The investment income and expenses (other than expenses incurred under the
Distribution Plan) and
18
<PAGE>
Notes to Financial Statements (unaudited) continued
realized and unrealized gains and losses on investments of the Fund are
allocated to separate classes of shares based upon their relative net asset
value on the date the income is earned or expenses and realized and unrealized
gains and losses are incurred.
Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
Note 3--Fees and Related Party Policies:
Investment Advisory and Administration Fees. MacKay-Shields Financial
Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an
Investment Advisory Agreement. MacKay-Shields is a registered investment adviser
and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New
York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect
wholly owned subsidiary of New York Life, is the Administrator for the Fund.
The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an annual
rate of the Fund's average daily net assets of 0.30% on assets up to $1 billion
and 0.275% on assets in excess of $1 billion.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"). The
Fund, with respect to each class of shares, has adopted a Distribution Plan (the
"Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Class A Plan, the Distributor receives payments from the Fund at
an annual rate of 0.25% of the average daily net assets of the Fund's Class A
shares, which is an expense of the Class A shares of the Fund for distribution
or service activities as designated by the Distributor. Pursuant to the Class B
Plan, the Fund's Class B shares are subject to the payment of a monthly
distribution fee, which is an expense of the Class B shares of the Fund, at the
annual rate of 0.75% of the lesser of:
(a) the aggregate gross sales of the Fund's Class B shares since the inception
of the Fund (not including reinvestment of dividends or capital gains
distributions), less the aggregate net asset value of the Fund's Class B shares
exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or upon which such charge has been
waived; or (b) the average daily net assets of the Fund's Class B shares.
The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund. Service fee as shown on the statement of
operations represents the fees for both Class A shares and Class B shares.
The Plan provides that the distribution fee is payable to NYLIFE Distributors
regardless of the amounts actually expended by NYLIFE Distributors for
distribution of the Fund's shares and service activities.
19
<PAGE>
MainStay Government Fund
NYLIFE Distributors anticipates that its actual distribution expenditures will
substantially exceed the distribution fee received by it during the initial
years of the operation of the Plan and that in later years its expenditures may
be less than the distribution fee.
Sales Charges. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $2,399 for the six
months ended June 30, 1997. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges for redemption of Class B shares of
$425,593 for the six months ended June 30, 1997.
Trustees Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee
of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus
reimbursement for travel and out-of-pocket expenses. The Trust allocates this
expense in proportion to the net assets of the respective Funds.
Other. NYLIFE Distributors has received $49,009 for providing the Fund certain
transfer agency services for the period January 1, 1997, through April 30, 1997.
Effective May 1, 1997, MainStay Shareholder Services Inc. ("MSS"), an indirect
wholly owned subsidiary of New York Life Insurance Company, was appointed
Transfer, Dividend Disbursing and Shareholder Servicing Agent. MSS was paid
$10,399 for services rendered May 1, 1997, through June 30, 1997.
Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $13,548 for the six months ended
June 30, 1997.
Fees for recordkeeping services provided to the Fund are charged to the Fund.
The fee for the six months ended June 30, 1997 amounted to $54,119.
Note 4--Federal Income Tax:
At December 31, 1996, for Federal income tax purposes, capital loss
carryforwards of $135,741,502, net of losses of $799,797 which have been
deferred for Federal income tax purposes, were available, as shown in the table
below, to the extent provided by regulations to offset future realized gains of
the Fund through 2004. To the extent that these carryforwards are used to offset
future capital gains, it is probable that the capital gains so offset will not
be distributed to shareholders.
<TABLE>
<CAPTION>
Capital Loss Amount
Available Through (000's)
================= =======
<S> <C>
1998 ...................................... $ 11,617
2000 ...................................... 4,831
2001 ...................................... 9,349
2002 ...................................... 96,653
2004 ...................................... 13,292
--------
$135,742
========
</TABLE>
20
<PAGE>
Notes to Financial Statements (unaudited) continued
Note 5--Portfolio Securities Loaned:
At June 30, 1997, the Government Fund had portfolio securities with a fair
market value of $171,623,428 on loan to broker-dealers and government securities
dealers. With respect to these securities loaned, the fund received collateral
with a fair market value of $185,658,713.
Note 6--Purchases and Sales of Securities (in 000's):
During the six months ended June 30, 1997, purchases and sales of U.S.
Government securities were $964,037 and $1,082,238, respectively. Purchases and
sales of securities other than U.S. Government securities, securities subject to
repurchase transactions and short-term securities, were $140,199 and $82,984,
respectively.
Note 7--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1997* December 31, 1996
================= ==================
Class A Class B Class A Class B
======= ======= ======= =======
<S> <C> <C> <C> <C>
Shares sold ................................ 642 2,981 1,262 8,590
Shares issued in reinvestment of dividends . 37 1,536 84 4,497
---- ------- ----- -------
679 4,517 1,346 13,087
Shares redeemed ............................ (554) (17,154) (828) (33,474)
---- ------- ----- -------
Net increase (decrease) .................... 125 (12,637) 518 (20,387)
==== ======= ===== =======
</TABLE>
- ----------
* Unaudited.
21
<PAGE>
The MainStay Funds
<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund graph indicating of companies in expanding markets and are willing to accept a higher
risk/reward of with strong growth potential level of risk for higher return potential
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in a portfolio that tracks You seek a conservative way to partici-
Equity Index Fund graph indicating the makeup and returns of the pate in the growth potential of stocks+
risk/reward of S&P 500*
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Offers broad diversification into You prefer the higher return potential
International Equity Fund graph indicating international stock markets with of international equities or want to
risk/reward of an emphasis on risk control add diversification to your domestic
Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Convertible Fund [Horizontal bar Invests in convertible securities for You want income from securities that
As of 6/2/97, this Fund graph indicating a special blend of long-term growth may offer growth potential if converted
was closed to new investors. risk/reward of potential and dividend income into common stock
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Balances current income with growth You seek a combination of income and
Total Return Fund graph indicating opportunities by investing in stocks, growth potential and want to manage
risk/reward of bonds, and money market instruments risk through diversification
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks undervalued stocks with You seek to maximize total return from
Value Fund graph indicating attractive dividends and a stimulus securities which may have more poten-
risk/reward of for positive change tial than the market currently sees
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's.
+ The original investment is guaranteed provided it is held for 10 years with
all dividend and capital gain distributions reinvested. If shares are
redeemed prior to or after the one-day guarantee date, the investor loses
the benefit of the guarantee with respect to those shares.
++ Investments in foreign securities may be subject to greater risks than
domestic investments. These risks include currency fluctuations, changes in
U.S. or foreign tax or currency laws, and changes in monetary policies and
economic and political conditions in foreign countries.
(S) While individual securities owned by the Government Fund may be guaranteed
by the U.S. government and its agencies, the share price of the Fund is not
guaranteed and will fluctuate with market conditions.
|| Certain of the Fund's investments may be speculative.
# Investments in the Money Market Fund are neither insured nor guaranteed by
the U.S. government and there is no assurance that the Fund will be able to
maintain a stable net asset value of $1.00 per share; investment returns
will vary with market conditions.
** A small portion of the Fund's income may be subject to state and local
taxes and the Alternative Minimum Tax. Capital gains, if any, may also be
taxed.
22
<PAGE>
INCOME FUNDS
<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Seeks a high level of current income You are seeking to combine high
GOVERNMENT FUND graph indicating consistent with safety of principal current income and safety of principal
risk/reward of primarily from U.S. government
Fund] securities(S)
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield [Horizontal bar An aggressive high-yield bond You want to maximize current income
graph indicating fund that is actively managed for and can accept the higher risk of
Corporate Bond Fund risk/reward of maximum current income|| securities with high yield potential
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current yields and You prefer the higher return potential
International Bond Fund graph indicating competitive total return from non- of international bonds or want to
risk/reward of U.S. bonds with an emphasis on add diversification to your domestic
Fund] risk control investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating stability of principal, and liquidity, competitive yields on cash you're plan-
risk/reward of with free checkwriting# ning to spend or invest in the near future
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks current income and competi- You seek to combine the return potential
Strategic Income Fund graph indicating tive overall return by investing in of high-grade, high-yield,|| and inter-
risk/reward of a diversified portfolio of domestic national bonds and want to manage risk
Fund] and foreign debt securities++ through multimarket diversification
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Seeks high current income exempt You are a California resident and want to
California Tax Free Fund graph indicating from both federal and California keep more of what you earn by invest-
risk/reward of income taxes consistent with ing for income that's double tax free**
Fund] preservation of capital**
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are a New York State or City resident
New York Tax Free Fund graph indicating from federal, New York State, and and want to keep more of what you earn
risk/reward of New York City income taxes consis- with income that's double or triple tax
Fund] tent with preservation of capital** free**
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are in a high federal income tax
Tax Free Bond Fund graph indicating from regular federal income tax con- bracket or want to pay less of your
risk/reward of sistent with preservation of capital** investment income to the IRS
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A word about risk and reward
The "thermometers" in the tables above show how much risk the investor must
assume and the related return potential. Generally speaking, investments with
higher return potential also carry higher risks. So, the longer the indicator
bar, the higher the risk and reward potential of the Fund.
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send any money. Shares
must be offered in the investor's state of residence.
23
<PAGE>
- --------------------------------------------------------------------------------
MAINSTAY
Government Fund
- --------------------------------------------------------------------------------
[GRAPHIC]
Semiannual Report
June 30, 1997
Unaudited
[LOGO] MAINSTAY(R)
FUNDS
OFFICERS & TRUSTEES
Alice T. Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
[LOGO] MAINSTAY(R) FUNDS
NYLIFE Distributors Inc.
Morris Corporate Center, Building A
300 Interpace Parkway
Parsippany, New Jersey 07054
Administrator & Distributor of The MainStay Funds
http://www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly owned subsidiary of
New York Life Insurance Company.
[LOGO]NEW YORK LIFE
This report is provided for the information of shareholders of the MainStay
Government Fund. It may be given to others only when preceded or accompanied by
an effective MainStay Funds prospectus. This report does not offer to sell any
securities or solicit orders to buy them.
(C)1997. All rights reserved. MSSA08-08/97
[GRAPHIC]
<PAGE>
Table of Contents
Chairperson's Letter 2
MainStay High Yield Corporate Bond Fund
Highlights 4
$10,000 Invested in the MainStay High Yield
Corporate Bond Fund versus S&P 500 and
Inflation--Class A & Class B Shares 5
Portfolio Management Discussion and Analysis 6
Year-by-Year & Six-Month Performance 7
Diversification by Industry--Top 5 8
Quality Breakdown 10
Returns & Lipper Rankings 11
Top 10 Holdings 12
10 Largest Purchases 13
10 Largest Sales 13
Portfolio of Investments 14
Unaudited Financial Statements 23
Notes to Financial Statements 27
The MainStay Funds 34
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
Chairperson's Letter
After a remarkable six-year period of expansion, the U.S. economy continued to
grow throughout the first half of 1997. For most investors, the overall impact
was positive, but there were some rough seas along the way.
As the stock market made gains early in the year, concerns about the possibility
of impending inflation brought increased price volatility. In late March, the
Federal Reserve Board moved to raise interest rates in an effort to slow
economic growth. Although this preemptive strike helped keep inflation in check,
the initial reaction from both the stock and bond markets was negative. As a
result, bond prices faltered and stocks tumbled more than 9% from their peak
before both markets began to stabilize.
As employment figures, earnings estimates, and other indicators began to suggest
that economic growth was slowing in the second quarter, the stock market not
only recovered lost ground, but soared to record highs. With higher valuations,
however, the market became increasingly volatile, reacting severely to any news
that could signal a shift in buying patterns or interest rates.
Positive performance, emerging concerns
Despite the volatility, domestic stock and bond markets closed the first half of
1997 with positive returns. While Malaysia and Singapore had negative results,
most international markets performed well. Given these results, many investors
are once again celebrating their good fortune. The underlying volatility,
however, should serve to remind us that the level of growth we've enjoyed for
more than six years is not typical market behavior.
Certainly no one can predict what will happen next, so it's important to keep
recent performance in perspective. We believe that having realistic
expectations, as well as a long-range plan and diversified investments can help
you work toward achieving your goals, wherever the markets may move.
Solid team approach
At MainStay(R), we believe our risk-averse approach can help provide reassurance
to many investors, particularly in uncertain times. Each MainStay Fund is
managed by a team of experienced professionals who employ disciplined investment
strategies to seek competitive returns with careful attention to downside risk.
Our team approach offers investors a combination of experience, insight, and
market perspective that few individuals could provide on their own. It also
helps provide important checks and balances in security selection, market
evaluation, and overall accountability.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
Our Fund managers believe that strong companies tend to get stronger in up
markets and perform better than average when the markets go down. Using
selection criteria appropriate to the individual Funds they manage, they may
look for specific catalysts that are likely to stimulate growth, enhance value,
or increase yield without taking on unnecessary risk.
Looking forward
As we move into the second half of 1997, we expect that an intensified focus on
inflation, interest rates, and corporate earnings will account for much of the
momentum driving the market. Regardless of how events unfold, you can be
confident that we will hold true to our disciplined management approach.
At MainStay, we believe that having a close relationship with your Registered
Representative is one of the best ways to keep your long-term focus in any
market environment. Therefore, we urge you to speak with your Registered
Representative regularly--whether the market happens to be up or down--so he or
she can understand your needs and help keep you on a steady course.
While we've seen positive results for the first half of the year, we remain
somewhat cautious. Whatever the future brings, we'll continue to provide the
information, service, and support you can consider when making decisions--and
the prudent management you depend on to pursue your long-range goals.
Sincerely,
/s/ Alice T. Kane
Alice T. Kane
July 1997
- --------------------------------------------------------------------------------
3
<PAGE>
MainStay High Yield Corporate Bond Fund Highlights
MARKET HIGHLIGHTS
FOR THE 6 MONTHS ENDED 6/30/97
- --------------------------------------------------------------------------------
o During the first half of 1997, the yield spreads of high-yield bonds
relative to U.S. Treasury securities were historically low.
o After moving within a narrow range, interest rates ended the reporting
period relatively unchanged.
o The high-yield bond market saw significant inflows of foreign capital,
strong new issuance, and historically low default levels.
- --------------------------------------------------------------------------------
FUND HIGHLIGHTS FOR THE
6- AND 12-MONTH PERIODS ENDED 6/30/97
- --------------------------------------------------------------------------------
o One-year total returns of 15.82% and 14.95% for Class A shares and Class B
shares, respectively, excluding all sales charges, for the period ended
6/30/97.
o The Fund emphasized high-quality, short-duration paper within prospectus
guidelines, but selectively sought opportunities among lower-quality bonds
with favorable risk/reward characteristics.
o Despite high levels of new issuance, the Fund primarily focused in the
secondary market, where liquidity and information flow allow for better
assessment of relative values.
o Both share classes outperformed the average Lipper* high current yield fund
for the six months ended 6/30/97.
- --------------------------------------------------------------------------------
- ----------
* See footnote + and table on page 11 for more information on Lipper
Analytical Services, Inc.
4
<PAGE>
$10,000 Invested in the MainStay
High Yield Corporate Bond Fund versus
S&P 500 and Inflation
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Mainstay High Yield
Corporate Bond
Period-End Fund S&P 500* Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
5/1/86 $ 9,550.00 $10,000.00 $10,000.00
12/86 $10,027.80 $10,518.00 $10,193.00
12/87 $10,046.70 $11,070.00 $10,644.00
12/88 $11,743.20 $12,903.00 $11,113.00
12/89 $11,151.10 $16,983.00 $11,629.00
12/90 $10,276.20 $16,457.00 $12,355.00
12/91 $13,592.60 $21,460.00 $12,724.00
12/92 $16,534.90 $23,093.00 $13,100.00
12/93 $20,115.00 $25,412.00 $13,459.00
12/94 $20,416.10 $25,747.00 $13,809.00
12/95 $24,556.80 $35,412.00 $14,168.00
12/96 $28,567.00 $43,536.00 $14,637.00
6/97 $30,445.00 $52,512.00 $14,738.00
</TABLE>
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Mainstay High Yield
Corporate Bond
Period-End Fund S&P 500* Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
5/1/86 $10,000.00 $10,000.00 $10,000.00
12/86 $10,500.30 $10,518.00 $10,193.00
12/87 $10,520.70 $11,070.00 $10,644.00
12/88 $12,296.60 $12,903.00 $11,113.00
12/89 $11,676.60 $16,983.00 $11,629.00
12/90 $10,760.40 $16,457.00 $12,355.00
12/91 $14,233.10 $21,460.00 $12,724.00
12/92 $17,314.00 $23,093.00 $13,100.00
12/93 $21,062.80 $25,412.00 $13,459.00
12/94 $21,378.10 $25,747.00 $13,809.00
12/95 $25,592.20 $35,412.00 $14,168.00
12/96 $29,579.00 $43,536.00 $14,637.00
6/97 $31,398.00 $52,512.00 $14,738.00
</TABLE>
- ----------
The Class A graph assumes an initial investment of $10,000 made on 5/1/86
reflecting the effect of the 4.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,550 and includes the historical
performance of the Class B shares for periods from inception (5/1/86) through
12/31/94. The Class B graph assumes an initial investment of $10,000 made on
5/1/86. Returns shown do not reflect the Contingent Deferred Sales Charge
(CDSC), as it would not apply for the period shown. All results include
reinvestment of distributions at net asset value and the change in share
price for the stated period. Past performance is no guarantee of future
results.
* "Standard & Poor's 500 Composite Stock Price Index" and "S&P 500" are
registered trademarks of Standard & Poor's. The S&P 500 is an unmanaged index
and is considered to be generally representative of the U.S. stock market.
Results assume the reinvestment of all income and capital gain distributions.
+ Inflation is represented by the Consumer Price Index (CPI), which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.
[GRAPHIC]
5
<PAGE>
Portfolio Management Discussion and Analysis
During the first half of 1997, the high-yield bond market received significantly
higher capital inflows than the year before, musch of it from foreign investors.
New insurance was up 38% over the first half of 1996. At the same time, only six
issues defaulted, for a 1.53% annualized default ratio, which is in a
---------
historically low range.
From January through June, interest rates remained relatively flat, with a
slight upward movement in the first quarter and a slight downward trend in the
second. In this environment, high-yield bonds offered historically low yield
-----
spreads to Treasury securities. As a result, the lower-quality segments of the
- ------- -------
market significantly outperformed other high-yield issues.
Given this context, how did the MainStay High Yield Corporate Bond Fund do in
the first half of 1997?
The MainStay High Yield Corporate Bond Fund returned 6.58% and 6.15% for Class A
shares and Class B shares, respectively, excluding all sales charges, for the
six months ended 6/30/97. Both share classes outperformed the average Lipper*
high current yield fund, which returned 5.92% over the same period.
What factors contributed the most to the Fund's outperformance?
The Fund's outperformance was largely due to an overweighting in the media,
-------------
telecommunications, and cable industries. These industries account for a large
percentage of high-yield issuance and their performance contributed positively
to the Fund's investments results.
Strategically speaking, what did you do?
With historically tight yield spreads, we increased the Fund's exposure to
investments in higher-quality, shorter-duration credits in keeping with the
--------
Fund's management disciplines.
Could you explain that in simpler terms?
Generally, you purchase high-yield bonds at a wide yield spread to Treasuries
hoping that as spreads narrow you'll have an opportunity to profit. In this
environment, the chance of spreads narrowing was low--so there were fewer
reasons to assume greater risk, either in terms of quality or duration. That
made higher-quality, shorter-duration bonds more attractive on a risk/reward
basis.
Don't you earn more income with lower-quality bonds?
Generally you do. But you also assume additional risk. Since we carefully
evaluate the relationship of risk and reward in every security we purchase for
the Fund, we were very selective in the lower-quality bonds we bought during the
reporting period. In particular, we tended to avoid the new issue market, where
we felt deals tended to be overpriced relative to the risks they carried. At the
same time, we did find selected opportunities in lower-rated bonds in the
secondary market.
[GRAPHIC]
Default
- -------
Failure of a debtor to repay principal or interest on an obligation or to meet
some other provision of a debt instrument. If an issuer defaults, bondholders
may make claims against the assets of the issuer to recoup their principal.
Yield spread
- ------------
The difference in yield between securities in different market sectors, such as
high-yield securities and Treasury issues--or between different securities in a
single sector, such as intermediate-term and short-term Treasury issues.
Credit quality
- --------------
A measure of an individual issuer's ability to repay principal and interest on
its income securities--or a measure of the general credit risk of securities in
an income portfolio.
- ----------
* See footnote and table on page 11 for more information on Lipper Analytical
Services, Inc.
6
<PAGE>
YEAR-BY-YEAR & SIX-MONTH PERFORMANCE
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Total Return
Period-end %
- -------------------------------------------
<S> <C>
12/86 5.01
12/87 0.20
12/88 16.89
12/89 -5.04
12/90 -7.85
12/91 32.27
12/92 21.63
12/93 21.65
12/94 1.50
12/95 20.28 Class A
12/95 19.71 Class B
12/96 16.33 Class A
12/96 15.58 Class B
6/97 6.58 Class A
6/97 6.15 Class B
</TABLE>
- ----------
Returns are for Class B shares unless otherwise noted. See footnote* on page 11
for more information on performance.
Can you give us an example?
One of our largest purchases--and sales--during the first half of 1997 was TCI
Satellite Entertainment. When their bonds first came to market, we felt the
company had to resolve some cash flow and corporate ownership issues before the
---------
securities would be attractive. While the company resolved these issues with a
significant equity investment and substantially improved its cash flow, the
bonds that were issued at 100 cents on the dollar went down to 75 cents on the
dollar. In March, we bought as much of the issue as we possibly could at 75
cents on the dollar and sold it in May and June when it returned to 100 cents.
That's a case where we thought the rewards would far outweigh any risks we took,
and our assessment benefited the portfolio handsomely.
What were some examples of the high-quality, short-duration paper?
Tenet Healthcare is an operator and consolidator of acute care hospitals. We
found their debt attractive and participated in two offerings, which have
performed pretty close to the market. Owens-Illinois is a container company. We
believed that they were going to restructure their debt and would tender for
------
their senior debt. We purchased a significant amount of their senior debt, they
did tender, and we rolled into the new deal, still believing that the investment
would show a positive risk/reward ratio. So it was a solid performer--and for a
high-quality credit, it was an outstanding performer.
Were there any industries that were particularly active?
Yes, telecommunications represents about 10% of the high-yield market, and we
identified a number of opportunities there. The second quarter was relatively
schizophrenic, as the market responded to the variety of telephone options, from
cellular to long-distance to local service alternatives. Cable companies also
got a shot in the arm through a series of deals.
We participated in Comcast's high-yield debt, which benefited when Microsoft
[GRAPHIC]
Weighting
- ---------
The proportion of a portfolio allocated to a specific security or sector, i.e.,
a fund is said to be overweighted in a sector when that portion of the portfolio
is larger than the sector's share of the market as a whole.
Duration
- --------
A measure of price sensitivity, which adjusts for the time value of the payments
investors will receive and which takes into account interest payments as well as
principal payments. Duration is a better gauge of interest-rate sensitivity than
average maturity alone.
Cash flow
- ---------
The amount of income or earnings available to cover outstanding liabilities and
other obligations, including debt service.
Tender
- ------
To offer money or goods in settlement of a prior debt or claim.
7
<PAGE>
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 6/30/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Industry Pecentage
- -------------------------------------
<S> <C>
Media 13.2%
Cable 8.8%
Cellular Telephone 7.5%
Electric Utilities 5.0%
Casinos 4.1%
All Other 61.4%
</TABLE>
- ----------
Actual percentages will vary over time. Excludes U.S. government & federal
agency issues.
made a billion-dollar investment in the company. The bonds advanced to almost
investment grade, with a BB+ rating, which gave the Fund's performance a
significant boost. The Fund owned Falcon Holding Group debt, which made
substantial gains in just one month. And the Fund also owned Microcell and
Millicom International Cellular, which both performed very strongly during the
second quarter.
Were there other industries that significantly impacted the Fund?
The paper industry was a strong performer, and we participated in that through
Stone Container and Gaylord Container, both of which contributed positively to
the Fund's performance in the second quarter. I should mention, however, that we
don't invest on an industry basis. We select securities on their individual
merits, based on their price and risk/reward characteristics.
Were there other themes in your investment strategy for the Fund?
We were consistent and conservative in our approach to investing for the Fund.
We weren't going to swing at every pitch. When something came along that was
going the right speed and was in our exact strike zone, we went for it.
And what exactly is your "strike zone?"
Well, the Fund's average credit rating is B. But we've pursued the higher
quality single-B securities with companies like Fresh Del Monte. This position
was added to the Fund during the first half of the year. We believe it is
significantly underrated by both the marketplace and the rating agencies. The
Fund also holds names like Selmer and Affinity Group that are B-rated bonds, but
have many of the quality characteristics of BB-rated bonds. And we think they're
quickly approaching that. So while the Fund's average credit rating is B, we
believe the Fund's bond holdings are at the higher end of the B category.
During the reporting period, we trimmed the Fund's CCC bonds and have added BB
securities. So overall, the Fund's credit quality has improved over the first
half of the year.
[GRAPHIC]
8
<PAGE>
What other companies did you buy during the first half of the year?
CMS Energy is an electric utility in Michigan that is another good example of a
high-quality, shorter-duration credit. They have a ten-year record of 6% annual
cash flow growth, which is very strong for a utility company. They have $3
billion in debt and $3 billion of equity value. CMS Energy had a BB piece of
paper we found attractive relative to the rest of the market and it has
performed well since we bought it early in the second quarter.
What securities have you sold?
We sold Spanish Broadcasting preferred, equity, and notes because they reached
our price target in April. We also sold TeleWest which was the largest cable
company in the U.K., but is now the second largest, because of merger activity.
That sale was also at a profit. Argosy Gaming was a casino holding in the gaming
industry that did well, but we sold it because we found better relative value in
other gaming issues.
Which securities were the best overall performers for the Fund?
The Fund's holdings in National Tobacco provided more than a 100% return over
the past year and over 70% in the second quarter. The Fund had an equity
position that came attached with its bonds, and we sold the equity at a very
attractive price.
I already mentioned TCI Satellite Entertainment and Millicom International
Cellular, both of which were among the Fund's top performers. CD Radio was
another top contributor. During the holding period it received a license and the
market recognized it as a valuable strategic asset.
Which securities underperformed?
Alliance Entertainment was clearly a poor investment. We felt they were going to
get help from a strategic investor, but that never happened. We also purchased
CS Wireless Systems at a discount of about 50 cents on the dollar, expecting it
to rise. But when the price continued to drop, it also negatively impacted
performance.
Are there areas where the Fund is currently over- or underweighted?
Yes. The Fund is currently overweighted in media broadcasting and
telecommunications, which has been a positive for performance. The Fund remains
underweighted in energy, where spreads widened by about 35 basis points during
the first half of the year. That didn't significantly affect overall
performance, and we're in the process of reassessing that weighting.
How much cash does the Fund currently have on hand?
Given what we perceive to be the overpricing in the market, we currently hold a
cash position of about 13%, which is somewhat lower than at the end of 1996.
- -------------
What is the biggest risk investors faced in the high-yield market?
Basic market risk. As we noted before, spreads are at historically tight levels
and pricing isn't particularly attractive in most new issues. So careful
evaluation of price,
[GRAPHIC]
Cash position
- -------------
The portion of a portfolio held in highly liquid securities (often referred to
as "cash"), either for defensive purposes or to take advantage of investment
opportunities as they may arise.
9
<PAGE>
risk, and reward is essential if we want to buy opportunity instead of just
buying bonds.
What do you foresee for the future?
We continue to believe we're in the late stages of a bull market in credit and
we want to remain cautious. We don't want to guess the shape of the yield curve.
-----------
Instead, we try to buy quality and get a fair return given where yields are
today. If spreads widen, and we think they will, we expect to take a more
aggressive stance, moving to lower-quality bonds that can offer appropriate
compensation for the risks they involve. As always, we'll seek to maximize
current income through diversified investments in high-yield securities, with
capital appreciation as a secondary objective.
Denis Laplaige
Steven Tananbaum
Portfolio Managers
QUALITY BREAKDOWN AS OF 6/30/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percentage
- -------------------------------------------------------------
<S> <C>
U.S. Government & Federal Agency 10.0%
A 0.2%
BBB 5.5%
BB 12.0%
B 41.5%
CCC 8.9%
CC 0.9%
Cash, Equivalents & Other Assets,
less Liabilities 12.9%
All Other 8.1%
</TABLE>
- ----------
Actual percentages will vary over time. Bond quality ratings provided by
Standard & Poor's. See the prospectus for details.
[GRAPHIC]
Yield curve
- -----------
When interest rates available from various short-, intermediate-, and long-term
securities are plotted on a graph, the resulting line is known as a yield curve.
The potential for high yield is accompanied by higher risk. Certain of the
Fund's investments may be speculative.
10
<PAGE>
Returns & Lipper Rankings as of 6/30/97
<TABLE>
<CAPTION>
Fund average annual total returns*
- --------------------------------------------------------------------------------------------------
Life of Fund
1 year 5 years 10 years through 6/30/97
<S> <C> <C> <C> <C>
Class A 15.82% 14.38% 11.47% 10.93%
Class B 14.95% 14.03% 11.30% 10.78%
- --------------------------------------------------------------------------------------------------
<CAPTION>
Fund SEC returns*
- --------------------------------------------------------------------------------------------------
Life of Fund
1 year 5 years 10 years through 6/30/97
<S> <C> <C> <C> <C>
Class A 10.61% 13.33% 10.95% 10.48%
Class B 9.95% 13.79% 11.30% 10.78%
- --------------------------------------------------------------------------------------------------
<CAPTION>
Fund Lipper+ rankings & Lipper category returns as of 6/30/97
- --------------------------------------------------------------------------------------------------
Life of Fund
1 year 5 years 10 years through 6/30/97
<S> <C> <C> <C> <C>
Class A 39 out of n/a n/a n/a
163 funds
Class B 67 out of 1 out of 5 out of 7 out of
163 funds 62 funds 45 funds 35 funds
Average Lipper high
current yield fund 14.77% 11.01% 9.64% 9.48%
- --------------------------------------------------------------------------------------------------
<CAPTION>
Fund per share net asset values & distributions for the six months ended 6/30/97
- --------------------------------------------------------------------------------------------------
NAV 6/30/97 Income Capital Gains
<S> <C> <C> <C>
Class A $8.44 $0.3600 $0.0000
Class B $8.42 $0.3360 $0.0000
- --------------------------------------------------------------------------------------------------
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested.
Class A shares, first offered to the public on 1/3/95, are sold with a
maximum initial sales charge of 4.5% and an annual 12b-1 fee of .25%.
Performance figures for this class include the historical performance of the
Class B shares for periods from inception (5/1/86) up to 12/31/94.
Performance data for the two classes after this date vary based on
differences in their expense structures. Class B shares of the Fund are sold
with no initial sales charge, but are subject to a maximum CDSC of up to 5%
if shares are redeemed during the first 6 years of purchase and an annual
12b-1 fee of up to 1%.
+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales charges.
Lipper averages listed above are not class specific. Life of Fund return is
from the period of the Class B shares' initial offering through 6/30/97. The
Fund's Class A shares were first offered to the public on 1/3/95; Class B
shares on 5/1/86.
[GRAPHIC]
11
<PAGE>
Top 10 Holdings as of 6/30/97
<TABLE>
<CAPTION>
HOLDING AMOUNT
- --------------------------------------------------------------------------------
<S> <C>
Viacom, Inc., 6.75%, due 1/15/03 $85,510,280
AES Corp., 8.00%, due 7/1/03 60,000,000
Le Groupe Videotron Ltee, 10.625%, due 2/15/05 49,296,380
Thermadyne Holdings Corp., 10.75%, due 11/1/03 45,196,483
UIH Australia/Pacific, Inc., Series B
(zero coupon), due 5/15/06, 14.00%, beginning 5/15/01 43,608,600
United International Holdings, Inc., (zero coupon), due 11/15/99 42,688,350
Millicom International Cellular, S.A., (zero coupon), due 6/1/06
13.50%, beginning 6/1/01 39,531,690
Affinity Group, Inc., 11.50%, due 10/15/03 38,947,838
Owens-Illinois, Inc.,7.85%, due 5/15/04 38,592,420
Spanish Broadcasting System, Inc., 14.25% 37,987,200
- --------------------------------------------------------------------------------
</TABLE>
[GRAPHIC]
- ----------
This breakdown is provided for informational purposes only. The Fund's holdings
may change daily. A shareholder owns shares of the Fund but does not own a
direct interest in any of the specific securities listed. Short-term securities
and U.S. government and federal agency issues are excluded. See Portfolio of
Investments for specific type of security held.
12
<PAGE>
10 Largest Purchases for the six months ended 6/30/97
<TABLE>
<CAPTION>
SECURITY AMOUNT OF PURCHASE
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Viacom, Inc.,6.75%, due 1/15/03 and Class A Common Stock $ 91,811,039
AES Corp., 8.00%, due 7/1/03 60,000,000
TCI Satellite Entertainment Corp., (zero coupon), due 2/15/07
12.25%, beginning 2/15/02 and TCI Pacific Communication, Inc.
5.00%, Class A Preferred Stock 45,727,259
Spanish Broadcasting System, Inc., 11.00%, due 3/15/04, 14.25%
Preferred Stock and 14.25% Preferred Stock Unit 45,032,950
Ionica, PLC, (zero coupon), due 5/1/07
15.00%, beginning 5/1/02 and 13.50%, due 8/15/06 43,423,284
Tenet Healthcare Corp., 7.875%, due 1/15/03 and 10.125%, due 3/1/05 39,708,175
Owens-Illinois, Inc., 7.85%, due 5/15/04 38,112,500
UIH Australia/Pacific, Inc.,Series B, (zero coupon), due 5/15/06
14.00%, beginning 5/15/01 37,247,940
United International Holdings, Inc., Series B, (zero coupon), due 11/15/99
(zero coupon), due 11/15/99 and Class A Common Stock 35,325,465
CMS Energy Corp., 8.125%, due 5/15/02 33,147,306
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
10 Largest Sales for the six months ended 6/30/97
SECURITY AMOUNT OF SALE
- ----------------------------------------------------------------------------------------------------------
<S> <C>
TCI Satellite Entertainment Corp., (zero coupon), due 2/15/07
12.25%, beginning 2/15/02 and TCI Pacific Communication, Inc.
5.00%, Class A Preferred Stock $60,044,904
TeleWest, PLC, (zero coupon), due 10/1/07, 11.00%, beginning 10/1/00 37,239,023
Argosy Gaming Co., 13.25%, due 6/1/04 36,934,573
Casino America, Inc., 11.50%, due 6/1/01 and 12.50%, due 8/1/03 36,027,581
Hollinger, Inc., Series U.S., (zero coupon), due 10/5/13 31,692,075
National Tobacco Holding, LLC, 13.50%, due 5/17/03, Preferred Interest
Redeemable Warrants and Class A Warrants 28,843,975
Penn Traffic Co., 8.625%, due 12/15/03 and 11.50%, due 4/15/06 23,493,324
Clearnet Communications, Inc., (zero coupon), due 12/15/05, 14.75%
beginning 12/15/00 and Warrants expiration 9/15/05 23,365,639
AirTouch Communications, Inc., 6.00%, Series B Preferred Stock
and Common Stock 22,435,244
SFX Broadcasting, Inc., Series E Preferred Stock 22,236,094
- ----------------------------------------------------------------------------------------------------------
</TABLE>
[GRAPHIC]
- ----------
This breakdown is provided for informational purposes only. The Fund's holdings
may change daily. All purchases and sales are aggregated by issuer. A
shareholder owns shares of the Fund but does not own a direct interest in any of
the specific securities listed. Short-term securities and U.S. government and
federal agency issues are excluded. See Portfolio of Investments for specific
type of security held.
13
<PAGE>
MainStay High Yield Corporate Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
=========================
LONG-TERM BONDS (77.8%)+
<S> <C> <C>
CONVERTIBLE BONDS (1.8%)
CELLULAR TELEPHONE (1.0%)
United States Cellular Corp.
(zero coupon), due 6/15/15 ....................... $86,345,000 $30,004,887
-----------
TELECOMMUNICATION SERVICES (0.8%)
PLD Telekom, Inc.
9.00%, due 6/1/06 (c) ............................ 3,020,000 2,869,000
Rogers Communications, Inc.
(zero coupon), due 5/20/13 (o) .................. 37,000,000 15,355,000
Tele-Communications
International, Inc.
4.50%, due 2/15/06 ............................... 9,500,000 7,564,375
-----------
25,788,375
-----------
Total Convertible Bonds
(Cost $55,029,997) ............................... 55,793,262
-----------
CORPORATE BONDS (55.2%)
AEROSPACE (0.7%)
K&F Industries, Inc.
11.875%, due 12/1/03 ............................. 5,022,000 5,317,042
Sequa Corp.
8.75%, due 12/15/01 .............................. 1,742,000 1,750,710
9.375%, due 12/15/03 ............................. 12,100,000 12,342,000
9.625%, due 10/15/99 ............................. 1,000,000 1,022,500
-----------
20,432,252
-----------
AUTO MANUFACTURING (0.2%)
Titan Tire Corp.
7.00%, due 2/11/00 (p) ........................... 6,542,838 6,264,767
-----------
AUTO PARTS (1.0%)
CSK Auto, Inc.
Series A
11.00%, due 11/1/06 .............................. 30,185,000 31,392,400
-----------
BUILDING MATERIALS (1.4%)
American Standard, Inc.
(zero coupon), due 6/1/05
10.50%, beginning 6/1/98 ......................... 25,950,000 25,495,875
Associated Materials, Inc.
11.50%, due 8/15/03 .............................. 8,683,000 9,203,980
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
<TABLE>
<CAPTION>
Principal
Amount Value
=========================
BUILDING MATERIALS (Continued)
<S> <C> <C>
DeGeorge Home Alliance, Inc.
12.00%, due 4/1/01 ............................... $ 1,000,000 $ 850,000
Triangle Pacific Corp.
10.50%, due 8/1/03 ............................... 1,500,000 1,601,250
USG Corp.
Series B
9.25%, due 9/15/01 ............................... 5,000,000 5,287,500
-----------
42,438,605
-----------
BUILDINGS (1.5%)
Greystone Homes, Inc.
10.75%, due 3/1/04 ............................... 20,424,000 22,364,280
NVR, Inc.
11.00%, due 4/15/03 .............................. 20,606,000 22,048,420
Standard Pacific Corp.
8.50%, due 6/15/07 ............................... 2,960,000 2,945,200
UDC Homes, Inc.
Series C
(zero coupon)
due 11/1/00 (a)(e)(h)(i) ......................... 108,500 27,125
-----------
47,385,025
-----------
CABLE (6.4%)
American Telecasting, Inc.
(zero coupon), due 6/15/04
14.50%, beginning 6/15/99 ........................ 42,165,000 13,492,800
Continental Cablevision, Inc.
11.00%, due 6/1/07 ............................... 8,600,000 9,670,270
CS Wireless Systems, Inc.
Series B
(zero coupon), due 3/1/06
11.375%, beginning 3/1/01 ........................ 26,983,000 6,341,005
Falcon Holding Group L.P.
11.00%, due 9/15/03 (m) .......................... 14,170,000 14,170,000
Heartland Wireless
Communications, Inc.
Series B
14.00%, due 10/15/04 ............................. 23,975,000 10,309,250
Marcus Cable Operating Co.
(zero coupon), due 8/1/04
13.50%, beginning 8/1/99 ......................... 33,304,000 28,974,480
UIH Australia/Pacific, Inc.
Series B
(zero coupon), due 5/15/06
14.00%, beginning 5/15/01 ........................ 72,681,000 43,608,600
United International Holdings, Inc.
(zero coupon), due 11/15/99 ...................... 55,260,000 42,688,350
Series B
(zero coupon), due 11/15/99 ...................... 39,830,000 30,768,675
-----------
200,023,430
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Portfolio of Investments June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
Principal
Amount Value
=========================
CORPORATE BONDS (Continued)
<S> <C> <C>
CASINOS (3.6%)
Casino America, Inc.
12.50%, due 8/1/03 ............................... $18,434,000 $19,033,105
Casino Magic Finance Corp.
11.50%, due 10/15/01 ............................. 26,659,000 23,726,510
Casino Magic Louisiana Corp.
13.00%, due 8/15/03 (c) .......................... 7,450,000 6,630,500
El Comandante Capital Corp.
11.75%, due 12/15/03 ............................. 19,680,000 19,876,800
Horseshoe Gaming LLC
Series B
12.75%, due 9/30/00 .............................. 13,954,000 15,558,710
President Riverboat Casinos, Inc.
13.00%, due 9/15/01 .............................. 29,961,000 24,568,020
Treasure Bay Gaming & Resorts
Class A
(zero coupon)
due 1/1/50 (a)(e)(h)(i) .......................... 9,886,075 2,534,888
Trump Castle Funding, Inc.
13.875%, due 11/15/05 (g) ........................ 230 222
-----------
111,928,755
-----------
CELLULAR TELEPHONE (2.6%)
CCPR Services, Inc.
10.00%, due 2/1/07 (c) ........................... 20,750,000 20,542,500
Celcaribe, S.A.
(zero coupon), due 3/15/04
13.50%, beginning 3/15/98 ........................ 2,700,000 2,565,000
(zero coupon), due 3/15/04
13.50%, beginning 3/15/98
(a)(c)(u) ........................................ 192 2,688,000
Centennial Cellular Corp.
8.875%, due 11/1/01 .............................. 20,618,000 20,514,910
10.125%, due 5/15/05 ............................. 10,350,000 10,764,000
McCaw International Ltd.
(zero coupon), due 4/15/07
13.00%, beginning 4/15/02 (c)(v) ................. 25,000 12,125,000
PriCellular Wireless Corp.
Series B
(zero coupon), due 11/15/01
14.00%, beginning 11/15/97 ....................... 9,355,000 9,916,300
10.75%, due 11/1/04 .............................. 3,310,000 3,442,400
-----------
82,558,110
-----------
CHEMICALS (0.5%)
Uniroyal Chemical Co., Inc.
9.00%, due 9/1/00 ................................ 14,450,000 14,702,875
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
=========================
CHILD CARE SERVICES (0.7%)
<S> <C> <C>
La Petite Holdings Corp.
9.625%, due 8/1/01 ............................... $20,292,000 $21,002,220
-----------
COMPUTERS & OFFICE EQUIPMENT (0.4%)
Unisys Corp.
10.625%, due 10/1/99 ............................. 3,500,000 3,605,000
11.75%, due 10/15/04 ............................. 6,457,000 7,054,272
15.00%, due 7/1/97 ............................... 2,500,000 2,500,000
-----------
13,159,272
-----------
CONGLOMERATES (0.4%)
Figgie International, Inc.
9.875%, due 10/1/99 .............................. 11,750,000 12,278,750
-----------
CONSUMER DURABLES (1.7%)
IHF Holdings, Inc.
Series B
(zero coupon), due 11/15/04
15.00%, beginning 11/15/99 ....................... 32,670,000 26,952,750
Samsonite Corp.
11.125%, due 7/15/05 ............................. 11,713,000 13,059,995
Selmer Co., Inc.
11.00%, due 5/15/05 .............................. 10,750,000 11,825,000
11.00%, due 5/15/05 (c) .......................... 1,500,000 1,620,000
-----------
53,457,745
-----------
CONTAINERS (2.1%)
Owens-Illinois, Inc.
7.85%, due 5/15/04 ............................... 38,000,000 38,592,420
Silgan Corp.
11.75%, due 6/15/02 .............................. 26,570,000 28,297,050
-----------
66,889,470
-----------
DEFENSE ELECTRONICS (0.3%)
Alliant Techsystems, Inc.
11.75%, due 3/1/03 ............................... 7,025,000 7,771,406
-----------
ELECTRIC UTILITIES (4.4%)
AES Corp.
8.00%, due 7/1/03 (p) ............................ 60,000,000 60,000,000
CMS Energy Corp.
8.125%, due 5/15/02 .............................. 33,040,000 33,370,400
Cleveland Electric
Illuminating Company (The) and
Toledo Edison Company (The)
Series A
7.19%, due 7/1/00 (c) ............................ 8,500,000 8,542,500
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
MainStay High Yield Corporate Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
=========================
CORPORATE BONDS (Continued)
<S> <C> <C>
ELECTRIC UTILITIES (Continued)
Midland Funding Corp. I
Series C-91
10.33%, due 7/23/02 .............................. $17,742,352 $18,984,316
Series C-94
10.33%, due 7/23/02 .............................. 8,832,824 9,451,122
Panda Funding Corp.
Series A-1
11.625%, due 8/20/12 ............................. 7,644,335 7,950,109
-----------
138,298,447
-----------
ENERGY (0.2%)
IRI International Corp.
Bank debt
8.97%, due 3/31/02 (j)(p) ........................ 5,000,000 5,015,750
-----------
EQUIPMENT FINANCING (2.3%)
Atlas Air, Inc.
12.25%, due 12/1/02 .............................. 11,112,000 12,334,320
GPA Delaware, Inc.
8.75%, due 12/15/98 .............................. 37,110,000 37,944,975
S-C Aircraft
Series 1997-C
11.00%, due 1/1/03 (c)(p) ........................ 12,900,000 12,900,000
World Airways, Inc.
10.25%, due 2/15/03 (p) .......................... 9,717,494 9,425,969
-----------
72,605,264
-----------
FOOD, BEVERAGES & TOBACCO (1.5%)
All-American Bottling Corp.
13.00%, due 8/15/01 .............................. 6,352,000 6,280,540
Colorado Prime Corp.
12.50%, due 5/1/04 (c)(w) ........................ 18,825 19,013,250
Foodbrands America, Inc.
10.75%, due 5/15/06 .............................. 17,130,000 20,081,842
-----------
45,375,632
-----------
HEALTH CARE (1.6%)
Abbey Healthcare Group, Inc.
9.50%, due 11/1/02 ............................... 4,987,000 5,136,610
Magellan Health Services, Inc.
Series A
11.25%, due 4/15/04 .............................. 1,995,000 2,224,425
Tenet Healthcare Corp.
7.875%, due 1/15/03 .............................. 8,000,000 8,020,000
10.125%, due 3/1/05 .............................. 28,890,000 31,562,325
Urohealth Systems, Inc.
12.50%, due 4/1/04 (c)(x) ........................ 3,500 3,395,000
-----------
50,338,360
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
=========================
INDUSTRIAL (2.4%)
<S> <C> <C>
Interlake Corp.
12.00%, due 11/15/01 ............................. $ 3,500,000 $ 3,850,000
ISP Holdings, Inc.
Series B
9.00%, due 10/15/03 .............................. 9,000,000 9,360,000
Newflo Corp.
Series B
13.25%, due 11/15/02 ............................. 16,285,000 17,628,512
Thermadyne Holdings Corp.
10.75%, due 11/1/03 .............................. 43,147,000 45,196,483
-----------
76,034,995
-----------
INSURANCE (0.1%)
Life Partners Group, Inc.
12.75%, due 7/15/02 .............................. 4,380,000 4,533,300
-----------
LEISURE (0.7%)
Bally's Health & Tennis Corp.
13.00%, due 1/15/03 .............................. 20,110,000 20,813,850
-----------
MEDIA (7.4%)
Allbritton Communications Co.
Series B
9.75%, due 11/30/07 .............................. 9,401,000 9,259,985
11.50%, due 8/15/04 .............................. 13,750,000 14,437,500
Comcast Corp.
9.125%, due 10/15/06 ............................. 7,000,000 7,315,000
9.50%, due 1/15/08 ............................... 4,300,000 4,515,000
10.25%, due 10/15/01 ............................. 4,001,000 4,361,090
Garden State Newspapers, Inc.
12.00%, due 7/1/04 ............................... 9,065,000 9,880,850
General Media, Inc.
10.625%, due 12/31/00 ............................ 41,411,000 36,441,680
Maxwell Communications Corp., PLC
Facility A (a)(h)(i)(j) .......................... 9,973,584 1,047,226
PanAmSat L.P.
(zero coupon), due 8/1/03
11.375%, beginning 8/1/98 ........................ 14,740,000 14,358,824
SCI Television, Inc.
11.00%, due 6/30/05 .............................. 28,428,000 30,240,285
Telemundo Group, Inc.
7.00%, due 2/15/06
10.50%, beginning 2/15/99 ........................ 9,500,000 9,120,000
Time Warner, Inc.
8.11%, due 8/15/06 ............................... 5,000,000 5,191,950
Viacom, Inc.
6.75%, due 1/15/03 ............................... 88,925,000 85,510,280
-----------
231,679,670
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE>
Portfolio of Investments (unaudited) continued
<TABLE>
<CAPTION>
Principal
Amount Value
=========================
CORPORATE BONDS (Continued)
<S> <C> <C>
PAPER & FOREST PRODUCTS (1.0%)
Gaylord Container Corp.
11.50%, due 5/15/01 .............................. $22,935,000 $24,110,419
Stone Container Corp.
11.875%, due 12/1/98 ............................. 1,900,000 2,004,500
12.625%, due 7/15/98 ............................. 5,750,000 6,044,687
-----------
32,159,606
-----------
POLLUTION & RELATED (0.3%)
ICF Kaiser International, Inc.
13.00%, due 12/31/03 ............................. 5,419,000 5,568,022
Series B
13.00%, due 12/31/03 ............................. 4,000,000 4,280,000
-----------
9,848,022
-----------
PUBLISHING (1.3%)
Affiliated Newspaper Investments, Inc.
(zero coupon), due 7/1/06
13.25%, beginning 7/1/99 ......................... 22,447,000 20,118,124
Hollinger International
Publishing, Inc.
8.625%, due 3/15/05 .............................. 19,300,000 19,541,250
-----------
39,659,374
-----------
REAL ESTATE (0.0%) (b)
Olympia & York Maiden
Lane Finance Corp.
10.375%, due 12/31/95
(a)(h)(i)(n) ..................................... 4,000 1,200
-----------
RECREATION & ENTERTAINMENT (3.2%)
Affinity Group, Inc.
11.50%, due 10/15/03 ............................. 36,315,000 38,947,838
Affinity Group Holding, Inc.
11.00%, due 4/1/07 (c) ........................... 28,935,000 30,381,750
Alliance Entertainment Corp.
Series B
11.25%, due 7/15/05 (h) .......................... 42,087,000 9,048,705
AMC Entertainment, Inc.
9.50%, due 3/15/09 (c) ........................... 20,525,000 20,986,813
-----------
99,365,106
-----------
RESTAURANTS & LODGING (1.2%)
American Restaurant Group, Inc.
Series 92
13.00%, due 9/15/98 .............................. 2,844,798 2,787,902
Series 93
13.00%, due 9/15/98 .............................. 4,870,226 4,772,822
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
=========================
RESTAURANTS & LODGING (Continued)
<S> <C> <C>
Family Restaurant, Inc.
9.75%, due 2/1/02 ................................ $13,895,000 $10,421,250
Flagstar Corp.
10.75%, due 9/15/01 .............................. 6,000,000 6,090,000
10.875%, due 12/1/02 ............................. 12,831,000 13,023,465
-----------
37,095,439
-----------
RETAIL (0.8%)
Barnes & Noble, Inc.
Series B
11.875%, due 1/15/03 ............................. 10,685,000 11,593,225
Brylane L.P., Series B
10.00%, due 9/1/03 ............................... 3,685,000 3,942,950
Eckerd Corp.
9.25%, due 2/15/04 ............................... 7,441,000 7,887,460
Guitar Center Management Co.
11.00%, due 7/1/06 ............................... 2,403,000 2,643,300
-----------
26,066,935
-----------
STEEL, ALUMINUM & OTHER METALS (0.8%)
Easco Corp.
Series B
10.00%, due 3/15/01 .............................. 20,150,000 20,452,250
UCAR Global Enterprises, Inc.
Series B
12.00%, due 1/15/05 .............................. 3,000,000 3,375,000
-----------
23,827,250
-----------
SUPERMARKETS (0.6%)
Big V Supermarkets, Inc.
Bank debt
8.688%, due 12/31/50 (p) ......................... 9,600,000 9,552,000
Dominick's Finer Foods, Inc.
10.875%, due 5/1/05 .............................. 8,169,600 9,027,408
-----------
18,579,408
-----------
TELECOMMUNICATION SERVICES (1.3%)
Globalstar L.P. Capital Corp.
11.25%, due 6/15/04 (c) .......................... 16,040,000 15,077,600
Metrocall, Inc.
10.375%, due 10/1/07 ............................. 18,812,000 17,307,040
Mobile Telecommunication
Technology Corp.
13.50%, due 12/15/02 ............................. 1,794,000 1,919,580
ProNet, Inc.
11.875%, due 6/15/05 ............................. 7,616,000 7,387,520
-----------
41,691,740
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE>
MainStay High Yield Corporate Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
==========================
CORPORATE BONDS (Continued)
<S> <C> <C>
TEXTILE & APPAREL (0.6%)
Hosiery Corp. of America, Inc.
13.75%, due 8/1/02 ............................... $17,587,000 $19,257,765
-------------
Total Corporate Bonds
(Cost $1,683,274,507) ............................ 1,723,932,195
-------------
FOREIGN BONDS (0.4%)
CHEMICALS (0.2%)
Kronos International, Inc.
Bank debt
5.051%, due 12/31/50 (d)(j)(p) .................. (DM)9,826,048 5,413,179
-------------
MEDIA (0.0%) (b)
Maxwell Communications Corp., PLC
Facility B (a)(h)(i)(j) ........................(Pound)1,131,066 197,657
-------------
RETAIL (0.0%) (b)
Isosceles
Bank debt
13.291%, due 6/30/98 (d)(aa) ..................... 925,864 3,852
Bank debt, Series B
13.291%, due 4/25/01 (d)(aa) ..................... 3,742,808 15,573
-------------
19,425
-------------
STEEL, ALUMINUM & OTHER METALS (0.2%)
Greenstone Resources Ltd.
9.00%, due 2/28/02 ............................... (C$)9,000,000 6,360,539
-------------
Total Foreign Bonds
(Cost $15,469,999) ............................... 11,990,800
-------------
U.S. GOVERNMENT &
FEDERAL AGENCY (10.0%)
FEDERAL NATIONAL MORTGAGE ASSOCIATION (3.4%)
Series B
12.00%, due 6/26/98 .............................. $100,000,000 105,641,000
-------------
UNITED STATES TREASURY BONDS (4.6%)
11.75%, due 2/15/01 .............................. 25,000,000 29,324,250
13.375%, due 8/15/01 ............................. 25,000,000 31,261,750
15.75%, due 11/15/01 ............................. 61,000,000 82,473,830
-------------
143,059,830
-------------
UNITED STATES TREASURY NOTES (2.0%)
9.125%, due 5/15/99 .............................. 10,900,000 11,477,373
14.25%, due 2/15/02 .............................. 40,000,000 52,412,400
-------------
63,889,773
-------------
Total U.S. Government &
Federal Agency
(Cost $331,482,571) .............................. 312,590,603
-------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
==========================
YANKEE BONDS (10.4%)
<S> <C> <C>
CABLE (1.7%)
CF Cable TV, Inc.
11.625%, due 2/15/05 ............................. $ 6,750,000 $ 7,627,500
Kabelmedia Holdings GmbH
(zero coupon), due 8/1/06
13.625%, beginning 8/1/01 ........................ 35,664,000 21,755,040
TeleWest, PLC
(zero coupon), due 10/1/07
11.00%, beginning 10/1/00 ........................ 31,928,000 22,988,160
-----------
52,370,700
-----------
CELLULAR TELEPHONE (3.4%)
Clearnet Communications, Inc.
(zero coupon), due 12/15/05
14.75%, beginning 12/15/00 ....................... 18,000,000 11,880,000
Microcell Telecommunications, Inc.
Series B
(zero coupon), due 6/1/06
14.00%, beginning 12/1/01 ........................ 23,023,000 12,892,880
Millicom International Cellular, S.A
(zero coupon), due 6/1/06
13.50%, beginning 6/1/01 ......................... 54,153,000 39,531,690
Occidente y Caribe Celular, S.A
Series B
(zero coupon), due 3/15/04
14.00%, beginning 3/15/01 ........................ 26,460,000 20,051,388
Rogers Cantel, Inc.
9.375%, due 6/1/08 ............................... 20,000,000 21,100,000
-----------
105,455,958
-----------
CONSUMER DURABLES (1.0%)
International Semi-Technology
Microelectronics, Inc.
(zero coupon), due 8/15/03
11.50%, beginning 8/15/00 ........................ 52,461,000 31,345,448
-----------
FOOD, BEVERAGES & TOBACCO (0.5%)
Fresh Del Monte Produce NV
Series B
10.00%, due 5/1/03 ............................... 16,170,000 16,695,525
-----------
MEDIA (1.6%)
Le Groupe Videotron Ltee
10.625%, due 2/15/05 ............................. 44,212,000 49,296,380
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
<PAGE>
Portfolio of Investments (unaudited) continued
<TABLE>
<CAPTION>
Principal
Amount Value
=========================
YANKEE BONDS (Continued)
<S> <C> <C>
PAPER & FOREST PRODUCTS (0.0%) (b)
Stone Container Finance Co.
11.50%, due 8/15/06 (c) ......................... $ 5,000 $ 5,175
-------------
REAL ESTATE (0.6%)
Trizec Finance Ltd.
10.875%, due 10/15/05 ............................ 16,716,000 18,471,180
-------------
RECREATION & ENTERTAINMENT (0.3%)
Plitt Theaters, Inc.
10.875%, due 6/15/04 ............................. 7,800,000 8,268,000
-------------
TELECOMMUNICATION SERVICES (1.2%)
Ionica, PLC
(zero coupon), due 5/1/07
15.00%, beginning 5/1/02 (y) ..................... 54,825 29,057,250
13.50%, due 8/15/06 .............................. 9,682,000 10,311,330
-------------
39,368,580
-------------
TESTING SERVICES (0.1%)
Intertek Testing Services Ltd.
12.00%, due 11/8/07 (m)(p) ....................... 4,235,362 4,277,716
-------------
Total Yankee Bonds
(Cost $302,300,442) .............................. 325,554,662
-------------
Total Long-Term Bonds
(Cost $2,387,557,516) ............................ 2,429,861,522
-------------
<CAPTION>
Shares
============
COMMON STOCKS (4.2%)
<S> <C> <C>
APPLIANCES & FURNITURE (0.0%) (b)
Central Rents, Inc. (a)(c) ......................... 10,500 630,000
----------
BUILDING MATERIALS (0.1%)
Hanson, PLC ADR (k) ................................ 76,750 1,918,750
----------
BUILDINGS (0.1%)
NVR, Inc. (a) ...................................... 167,400 2,552,850
----------
CABLE (0.7%)
CS Wireless Systems, Inc. (a)(c) .................. 5,181 5
United International Holdings
Inc., Class A (a) ................................ 1,987,700 20,622,388
----------
20,622,393
----------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
=========================
CASINOS(0.3%)
<S> <C> <C>
Casino America, Inc. (a) ........................... 207,925 $ 454,836
Colorado Gaming &
Entertainment Co. (a) ............................ 368,128 1,564,544
Grand Casinos, Inc. (a) ............................ 472,600 6,970,850
-----------
8,990,230
-----------
CELLULAR TELEPHONE (0.4%)
AirTouch Communications, Inc. (a) .................. 350,000 9,625,000
Celcaribe, S.A. (a)(c) ............................. 439,020 1,097,550
Clearnet Communications, Inc.
Class A (a) ...................................... 169,500 2,055,188
Rogers Cantel Mobile
Communications, Inc., Class B (a) ................ 60,000 1,136,250
-----------
13,913,988
-----------
CHEMICALS (0.2%)
Millennium Chemicals, Inc. ......................... 283,857 6,457,747
-----------
CONGLOMERATES (0.1%)
General Motors Corp., Class H ...................... 68,100 3,924,263
-----------
DRUGS (0.0%) (b)
ICN Pharmaceuticals, Inc. .......................... 11,842 339,717
-----------
ELECTRIC UTILITIES (0.6%)
Energy Group, PLC ADR (k) .......................... 76,750 3,252,281
PECO Energy Co. .................................... 705,000 14,805,000
-----------
18,057,281
-----------
FOOD, BEVERAGES & TOBACCO (0.3%)
Dr. Pepper Bottling Holdings, Inc.
Class A (a) ...................................... 200,000 3,800,000
Imperial Tobacco Group, PLC
ADR (k) .......................................... 153,500 1,974,777
RJR Nabisco Holdings Corp. ......................... 90,000 2,970,000
TLC Beatrice International Holdings
Inc., Class A (a) ................................ 25,000 762,500
-----------
9,507,277
-----------
GAS UTILITIES (0.0%) (b)
United Gas Holdings Corp. (a)(e)(h) ................ 98,050 166,685
-----------
INDUSTRIAL (0.2%)
Thermadyne Holdings Corp. (a) ...................... 199,350 6,279,525
-----------
MEDIA (0.3%)
Comcast Corp.
Class A .......................................... 270,000 5,653,125
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
<PAGE>
MainStay High Yield Corporate Bond Fund
<TABLE>
<CAPTION>
Shares Value
=========================
COMMON STOCKS (Continued)
<S> <C> <C>
MEDIA (Continued)
Le Groupe Videotron Ltee (z) ....................... 46,800 $ 378,240
Matav-Cable Systems Media
Ltd. ADR (a)(k) .................................. 202,300 3,540,250
-----------
9,571,615
-----------
PUBLISHING (0.1%)
Affiliated Newspaper
Investments, Inc. (a) ............................ 28,000 2,800,000
-----------
REAL ESTATE (0.1%)
American Health Properties, Inc. (l) ............... 5,130 93,622
Metropolis Realty Trust, Inc. ...................... 126,278 4,072,466
-----------
4,166,088
-----------
RESTAURANTS & LODGING (0.1%)
Bob Evans Farms, Inc. .............................. 190,000 3,218,125
-----------
RETAIL (0.0%) (b)
Loehmann's Holdings, Inc.
Series B (a) ..................................... 43,750 43,750
-----------
STEEL, ALUMINUM & OTHER METALS (0.3%)
Newmont Mining Corp. ............................... 61,500 2,398,500
Ryerson Tull, Inc., Class A (a) .................... 348,300 5,746,950
-----------
8,145,450
-----------
SUPERMARKETS (0.0%) (b)
Grand Union Co. (The) (a) .......................... 51,999 116,998
-----------
TELECOMMUNICATION SERVICES (0.3%)
PageMart Wireless, Inc., Class A (a) ............... 45,500 386,750
Paging Network, Inc. (a) ........................... 434,000 3,811,062
Rogers Communications, Inc.
Class B (a)(z) ................................... 1,066,375 6,686,100
-----------
10,883,912
-----------
TEXTILE & APPAREL (0.0%) (b)
Hosiery Corp. of America, Inc. (a) ................. 17,400 121,800
-----------
Total Common Stocks
(Cost $130,168,027) ............................. 132,428,444
-----------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
=========================
PREFERRED STOCKS (4.6%)
<S> <C> <C>
BANKS (0.0%) (b)
River Bank America, N.Y.
15.00%, Series A ................................. 30,000 $ 697,500
-----------
CABLE (0.0%) (b)
Cablevision Systems Corp.
8.50%, Series I (r) .............................. 8,000 217,000
-----------
CASINOS (0.2%)
Station Casinos, Inc.
7.00% (r) ........................................ 125,600 5,620,600
-----------
CELLULAR TELEPHONE (0.0%) (b)
AirTouch Communications, Inc.
6.00%, Series B (r) .............................. 50,300 1,433,550
-----------
DOMESTIC OIL & GAS (0.0%) (b)
Mesa, Inc.
8.00%, Series A (g)(r) ........................... 518 3,433
-----------
DRUGS (0.2%)
ICN Pharmaceuticals, Inc.
Series B (c)(m)(r) ............................... 6,935 6,935,000
-----------
EQUIPMENT FINANCING (0.5%)
GPA Group, PLC (a)(p) .............................. 30,000,000 15,450,000
-----------
FOOD, BEVERAGES & TOBACCO (0.0%) (b)
Seven Up Holdings Co.
16.00% (a) ....................................... 4,491 129,542
-----------
MEDIA (3.5%) CD Radio, Inc.
5.00% Delayed Preferred Stock
(a)(c)(r) ........................................ 734,286 22,762,866
Chancellor Radio Broadcasting Co.
12.00% (c)(g) .................................... 69,400 7,946,300
Granite Broadcasting Corp.
12.75% (c)(g) .................................... 9,000 8,730,000
Paxson Communications Corp.
12.50% (g) ....................................... 30,004 31,504,305
Spanish Broadcasting System, Inc.
14.25% (c)(g) .................................... 39,570 37,987,200
-----------
108,930,671
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
<PAGE>
Portfolio of Investments June 30, 1997 (unaudited) continued
<TABLE>
<CAPTION>
Shares Value
=========================
PREFERRED STOCKS (Continued)
<S> <C> <C>
RETAIL (0.0%) (b)
Loehmann's Holdings, Inc.
$0.056, Series A (g) ............................. 2,297 $ 1,148
-----------
TELECOMMUNICATION SERVICES (0.2%)
ICG Holdings, Inc.
14.00% (c)(m) .................................... 4,450 4,594,625
-----------
Total Preferred Stocks
(Cost $127,198,407) .............................. 144,013,069
-----------
WARRANTS (0.5%)
CABLE (0.0%) (b)
United International Holdings
Inc. (a) ......................................... 20,834 62,502
-----------
CASINOS (0.0%) (b)
Belle Casino, Inc. (a)(c) .......................... 5,500 55
Boomtown, Inc.
expire 11/1/98 (a)(c) ............................ 7,350 7,350
Casino America, Inc.
expire 5/3/01 (a) ................................ 36,808 36,808
HDA Management Corp.
expire 12/15/98 (a)(c) ........................... 6,450 322,500
Louisiana Casino, Inc.
expire 12/1/98 (a) ............................... 12,000 60,000
-----------
426,713
-----------
CELLULAR TELEPHONE (0.1%)
Microcell Telecommunications, Inc.
expire 6/1/06 (a)(c)(q) .......................... 92,092 57,558
expire 6/1/06 (a)(c) ............................. 92,092 1,151,150
Nextel Communications, Inc.
Series A
expire 12/15/98 (a) .............................. 3,087 15,435
Series C
expire 1999 (a) .................................. 3,500 17,500
Occidente y Caribe Celular, S.A.
expire 3/15/04 (a)(c) ............................ 105,840 1,058
-----------
1,242,701
-----------
CONGLOMERATES (0.0%) (b)
IFA Capital, Inc.
Series H
expire 11/14/99 (a)(c) ........................... 8,000 800,000
-----------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
=========================
GAS UTILITIES (0.0%) (b)
<S> <C> <C>
UGI Corp.
expire 3/31/98 (a) ............................... 34,580 $ 5,187
-----------
HOUSEHOLD PRODUCTS (0.0%) (b)
Chattem, Inc.
expire 6/17/99 (a)(c) ............................ 9,500 199,500
-----------
MEDIA (0.4%)
General Media, Inc.
expire 12/21/00 (a) .............................. 34,486 172,430
Spanish Broadcasting System, Inc.
expire 6/30/99 (a)(bb) ........................... 44,150 9,713,000
expire 6/30/99 (a)(c)(cc) ........................ 19,780 2,373,600
-----------
12,259,030
-----------
POLLUTION & RELATED (0.0%) (b)
ICF Kaiser International, Inc.
expire 12/31/98 (a) .............................. 48,835 12,209
expire 12/31/98 (a) .............................. 28,000 28,000
-----------
40,209
-----------
TESTING SERVICES (0.0%) (b)
Intertek Testing Services Ltd.
expire 12/31/99 (a)(p) ........................... 691 220,000
-----------
Total Warrants
(Cost $7,642,620) ............................... 15,255,842
-----------
<CAPTION>
Notional
Principal
Amount
==========
PURCHASED PUT OPTION (0.0%) (b)
<S> <C> <C>
FOOD, BEVERAGES & TOBACCO (0.0%) (b)
Underlying security, RJR Nabisco, Inc.
8.75%, due 8/15/05
expire 10/6/97 (f) ............................... $25,000,000 27,500
-----------
Total Purchased Put Option
(Cost $500,000) .................................. 27,500
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
<PAGE>
MainStay High Yield Corporate Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
===============================
SHORT-TERM INVESTMENTS (11.6%)
<S> <C> <C>
COMMERCIAL PAPER (3.3%)
American Express Credit Corp.
5.565%, due 7/15/97 .............................. $ 102,902,000 $ 102,902,000
---------------
Total Commercial Paper
(Cost $102,902,000) .............................. 102,902,000
---------------
SHORT-TERM BONDS
ENERGY (0.2%)
IRI International Corp.
12.27%, due 3/3/98 (c)(p) ........................ 6,200,000 6,200,000
---------------
MEDIA (0.0%) (b)
Time Warner, Inc.
7.45%, due 2/1/98 ................................ 310,000 311,848
---------------
Total Short-Term Bonds
(Cost $6,512,418) ................................ 6,511,848
---------------
U.S. GOVERNMENT (8.1%)
United States Treasury Notes
5.875%, due 7/31/97 .............................. 139,775,000 139,818,330
8.50%, due 7/15/97 ............................... 111,000,000 111,138,750
---------------
Total U.S. Government
(Cost $251,752,074) .............................. 250,957,080
---------------
Total Short-Term Investments
(Cost $361,166,492) .............................. 360,370,928
---------------
Total Investments
(Cost $3,014,233,062) (s) ........................ 98.7% 3,081,957,305(t)
Cash and Other Assets,
Less Liabilities ................................. 1.3 39,778,202
--------------- ---------------
Net Assets ......................................... 100.0% $ 3,121,735,507
=============== ===============
</TABLE>
- ----------
(a) Non-income producing securities.
(b) Less than one tenth of a percent.
(c) May be sold to institutional investors only.
(d) Floating rate. Rate shown is the rate in effect at June 30, 1997.
(e) Fair valued securities. Aggregate at 0.09% of net assets.
(f) Purchased put option is based on spread between the risk/duration of
RJR Nabisco, Inc., Note 8.75%, due 8/15/05, multiplied by the yield on
the RJR Nabisco Note less the yield on the U.S. Treasury Bond 6.50%,
due 8/15/05, less 3.50%, multiplied by the notional principal.
(g) PIK ("Payment in Kind")--interest or dividend payment is made with
additional securities.
(h) Issuer in bankruptcy.
(i) Issue in default.
(j) Multiple tranche facilities.
(k) ADR--American Depository Receipt.
(l) Depository Shares--each share represents one-tenth of a share of
Psychiatric Group preferred stock.
(m) CIK ("Cash in Kind")--interest or dividend payment is made with cash
or additional securities.
(n) The company defaulted on the payment of principal to its creditors on
maturity date.
(o) Yankee bond.
(p) Restricted securities.
(q) Conditional warrants.
(r) Convertible preferred stocks.
(s) The cost for Federal income tax purposes is $3,015,621,240.
(t) At June 30, 1997, net unrealized appreciation was $66,336,065, based
on cost for Federal income tax purposes. This consisted of aggregate
gross unrealized appreciation for all investments on which there was
an excess of market value over cost of $138,397,515 and aggregate
gross unrealized depreciation for all investments on which there was
an excess of cost over market value of $72,061,450.
(u) 192 Units--each unit reflects $10,000 principal amount of 0%/13.50%
Senior Secured Note Trust Certificates, plus 1,626 Ordinary Share
Trust Certificates.
(v) 25,000 Units--each unit reflects $1,000 principal amount of 13.00%
Senior Discounted Notes, plus 1 warrant to acquire 0.10616 shares of
common stock at an exercise price of $36.45 per share at a future
date.
(w) 18,825 Units--each unit reflects $1,000 principal amount of Senior
Notes, plus 0.19608 warrants to acquire 1 share of common stock at
$100.00 per share at a future date.
(x) 3,500 Units--each unit reflects $1,000 principal amount of Senior
Subordinated Notes, plus 1 warrant to acquire shares of common stock
at a future date.
(y) 54,825 Units--each unit reflects $1,000 principal amount of Senior
Discounted Notes, plus 1 warrant to acquire 19.619 shares of common
stock at $0.10 per share at a future date.
(z) Canadian securities.
(aa) Issuer in liquidation proceedings.
(bb) Each warrant entitles the holder thereof to purchase one share of the
Company's Class A common stock at $0.01 per share, subject to
adjustment under certain circumstances on or after the Exercisability
Date and prior to June 30, 1999.
(cc) Each warrant entitles the holder thereof to purchase 0.428 shares of
the Company's Class A common stock, par value $0.01 per share.
(Pound) Security denominated in Pound Sterling.
(C$) Security denominated in Canadian Dollar.
(DM) Security denominated in Deutsche Mark.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
22
<PAGE>
Statement of Assets and Liabilities as of June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investment in securities, at value (identified cost $3,014,233,062) ... $ 3,081,957,305
Deposit with broker ................................................... 2,541,008
Receivables:
Dividends and interest .............................................. 58,766,345
Investment securities sold .......................................... 31,222,498
Fund shares sold .................................................... 13,865,684
Unrealized net appreciation on forward foreign currency contracts ..... 251,220
Other assets .......................................................... 43,586
---------------
Total assets ...................................................... 3,188,647,646
---------------
LIABILITIES:
Payables:
Investment securities purchased ..................................... 39,012,346
Fund shares redeemed ................................................ 2,730,328
NYLIFE Distributors ................................................. 2,711,997
Adviser ............................................................. 707,484
Transfer agent ...................................................... 325,516
Custodian ........................................................... 17,016
Trustees ............................................................ 15,226
Accrued expenses ...................................................... 556,723
Dividend payable ...................................................... 20,835,503
---------------
Total liabilities ................................................. 66,912,139
---------------
Net assets ............................................................ $ 3,121,735,507
===============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A ............................................................. $ 208,928
Class B ............................................................. 3,496,774
Additional paid-in capital ............................................ 2,962,516,770
Accumulated distribution in excess of net investment income ........... (4,014,468)
Accumulated undistributed net realized gain on investments ............ 91,749,595
Net unrealized appreciation on investments ............................ 67,724,243
Net unrealized appreciation on forward foreign currency contracts ..... 53,665
---------------
Net assets ............................................................ $ 3,121,735,507
===============
CLASS A
Net assets applicable to outstanding shares ........................... $ 176,231,745
===============
Shares of beneficial interest outstanding ............................. 20,892,777
===============
Net asset value per share outstanding ................................. $ 8.44
Maximum sales charge (4.50% of offering price) ........................ 0.40
---------------
Maximum offering price per share outstanding .......................... $ 8.84
===============
CLASS B
Net assets applicable to outstanding shares ........................... $ 2,945,503,762
===============
Shares of beneficial interest outstanding ............................. 349,677,431
===============
Net asset value and offering price per share outstanding .............. $ 8.42
===============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
23
<PAGE>
Statement of Operations for the six months ended June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Income:
Dividends (a) ..................................................................... $ 5,596,040
Interest .......................................................................... 127,274,758
-------------
Total income .................................................................... 132,870,798
-------------
Expenses:
Distribution--Class B ............................................................. 7,669,699
Administration .................................................................... 3,899,979
Advisory .......................................................................... 3,899,979
Service ........................................................................... 3,489,084
Transfer agent .................................................................... 1,615,346
Shareholder communication ......................................................... 249,717
Registration ...................................................................... 200,151
Professional ...................................................................... 191,091
Recordkeeping ..................................................................... 154,184
Custodian ......................................................................... 129,537
Trustees .......................................................................... 36,008
Miscellaneous ..................................................................... 25,432
-------------
Total expenses .................................................................. 21,560,207
-------------
Net investment income ............................................................... 111,310,591
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain from:
Security transactions ............................................................. 79,447,069
Foreign currency transactions ..................................................... 352,305
-------------
Net realized gain on investments and foreign currency transactions .................. 79,799,374
-------------
Net change in unrealized appreciation (depreciation) on investments:
Security transactions ............................................................. (15,036,995)
Forward foreign currency contracts ................................................ 199,746
-------------
Net unrealized loss on investments and foreign currency ............................. (14,837,249)
-------------
Net realized and unrealized gain on investments and foreign currency transactions ... 64,962,125
-------------
Net increase in net assets resulting from operations ................................ $ 176,272,716
=============
</TABLE>
- ----------
(a) Dividends recorded net of foreign withholding taxes of $54,729.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
24
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six months
ended Year ended
June 30, December 31,
1997* 1996
=============== ===============
INCREASE IN NET ASSETS:
<S> <C> <C>
Operations:
Net investment income ........................................................................ $ 111,310,591 $ 174,787,175
Net realized gain on investments ............................................................. 79,447,069 70,039,639
Net realized loss on securities sold short ................................................... -- (508,346)
Net realized gain (loss) on foreign currency transactions .................................... 352,305 (912,219)
Net change in unrealized appreciation (depreciation) on securities transactions .............. (15,036,995) 58,603,932
Net change in unrealized depreciation on securities sold short ............................... -- 375,243
Net change in unrealized appreciation (depreciation) on forward foreign currency contracts ... 199,746 42,977
--------------- ---------------
Net increase in net assets resulting from operations ......................................... 176,272,716 302,428,401
--------------- ---------------
Dividends and distributions to shareholders:
From net investment income:
Class A .................................................................................... (6,432,829) (6,713,725)
Class B .................................................................................... (109,715,399) (164,209,186)
From net realized gain on investments and foreign currency transactions:
Class A .................................................................................... -- (2,453,906)
Class B .................................................................................... -- (51,503,367)
--------------- ---------------
Total dividends and distributions to shareholders ........................................ (116,148,228) (224,880,184)
--------------- ---------------
Capital share transactions:
Net proceeds from sale of shares:
Class A .................................................................................... 86,133,059 101,308,968
Class B .................................................................................... 602,338,074 913,192,615
Net asset value of shares issued to shareholders in reinvestment of dividends
and distributions:
Class A .................................................................................... 3,738,248 7,136,763
Class B .................................................................................... 61,101,983 152,975,773
--------------- ---------------
753,311,364 1,174,614,119
Cost of shares redeemed:
Class A .................................................................................... (33,810,399) (37,057,233)
Class B .................................................................................... (215,875,116) (301,207,596)
--------------- ---------------
Increase in net assets derived from capital share transactions ........................... 503,625,849 836,349,290
--------------- ---------------
Net increase in net assets ............................................................... 563,750,337 913,897,507
NET ASSETS:
Beginning of period ............................................................................ 2,557,985,170 1,644,087,663
--------------- ---------------
End of period .................................................................................. $ 3,121,735,507 $ 2,557,985,170
=============== ===============
Accumulated undistributed net investment income (excess distribution) .......................... $ (4,014,468) $ 823,169
=============== ===============
</TABLE>
- ----------
* Unaudited.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
25
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class B
====================================
Class A Class B Class A Class B Class A Class B September 1
======= ======= ======= ======= ======= ======= through Year ended August 31
Six months ended Year ended Year ended December 31 ========================
June 30, 1997* December 31, 1996 December 31, 1995 1994** 1994 1993 1992
======================= ==================== =================== ======== ==== ==== ====
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period...... $ 8.27 $ 8.26 $ 7.92 $ 7.92 $ 7.44 $ 7.44 $ 7.70 $ 7.93 $ 7.41 $ 6.66
----- ------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income...... 0.35 0.32 0.72 0.67 0.84 0.81 0.23 0.69 0.70 0.79
Net realized and
unrealized gain
(loss) on investments.... 0.18 0.18 0.52 0.52 0.61 0.61 (0.27) (0.08) 0.54 0.75
Net realized and
unrealized loss
on foreign
currency transactions.... (0.00)(b) (0.00)(b) (0.00)(b) (0.00)(b) (0.00)(b) (0.00)(b) -- -- -- --
----- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations............... 0.53 0.50 1.24 1.19 1.45 1.42 (0.04) 0.61 1.24 1.54
----- ------ ------ ------ ------ ------ ------ ------ ------ ------
Less dividends and
distributions:
From net investment
income................... (0.36) (0.34) (0.71) (0.67) (0.84) (0.81) (0.22) (0.67) (0.72) (0.79)
In excess of net
investment income........ -- -- -- -- (0.01) (0.01) -- -- -- --
From net realized gain
on investments........... -- -- (0.18) (0.18) (0.10) (0.10) -- (0.17) -- --
In excess of net realized
gain on investments...... -- -- -- -- (0.02) (0.02) -- -- -- --
----- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total dividends and
distributions............ (0.36) (0.34) (0.89) (0.85) (0.97) (0.94) (0.22) (0.84) (0.72) (0.79)
----- ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value at end of
period................... $8.44 $ 8.42 $ 8.27 $ 8.26 $ 7.92 $ 7.92 $ 7.44 $ 7.70 $ 7.93 $ 7.41
===== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total investment return(a). 6.58% 6.15% 16.33% 15.58% 20.28% 19.71% (0.48%) 7.95% 18.58% 24.55%
Ratios (to average net
assets)/
Supplemental Data:
Net investment income . 8.54%+ 7.95%+ 9.0% 8.4% 10.2% 9.5% 9.1%+ 8.7% 9.9% 11.0%
Expenses............... 1.00%+ 1.59%+ 1.0% 1.6% 1.0% 1.6% 1.6%+ 1.6% 1.7% 1.9%
Portfolio turnover rate.... 55% 55% 118% 118% 137% 137% 45% 190% 207% 226%
Average commission rate
paid..................... $0.0570 $ 0.0570 $ 0.0630 $ 0.0630 (c) (c) (c) (c) (c) (c)
Net assets at end of
period (in 000's)....... $176,232 $2,945,504 $116,805 $2,441,180 $42,850 $1,601,238 $1,128,913 $1,090,261 $808,538 $447,819
</TABLE>
- ----------
* Unaudited.
** The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is not
annualized.
(b) Less than one cent per share.
(c) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
26
<PAGE>
Notes to Financial Statements (unaudited)
Note 1--Organization and Business:
The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business
Trust. The Trust is registered under the Investment Company Act of 1940, as
amended, (the "Act") as an open-end management investment company and is
comprised of fourteen funds. These financial statements and notes relate only to
MainStay High Yield Corporate Bond Fund (the "Fund").
The Fund currently offers two classes of shares. Class A shares, whose
distribution commenced on January 3, 1995, are offered at net asset value per
share plus an initial sales charge. Class B shares are offered without an
initial sales charge, although a declining contingent deferred sales charge may
be imposed on redemptions made within six years of purchase. Class A shares and
Class B shares bear the same voting (except for issues that relate solely to one
class), dividend, liquidation and other rights and conditions except that the
Class B shares are subject to higher distribution fee rates. Each class of
shares bears distribution and/or service fee payments under a distribution plan
pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The Fund's primary objective is to maximize current income through investment in
a diversified portfolio of high yield debt securities which are ordinarily rated
in the lower rating categories of recognized rating agencies.
Note 2--Significant Accounting Policies:
The following is a summary of significant accounting policies followed by the
Fund:
Valuation of Fund Shares. The net asset value per share of each class of shares
is calculated on each day the New York Stock Exchange (the "Exchange") is open
for trading as of the close of regular trading on the Exchange. The net asset
value per share of each class of shares is determined by taking the assets
attributable to a class of shares, subtracting the liabilities attributable to
that class, and dividing the result by the outstanding shares of that class.
Securities Valuation. Portfolio securities of the Fund are stated at value
determined (a) by appraising common and preferred stocks which are traded on the
New York Stock Exchange at the last sale price on that day or, if no sale
occurs, at the mean between the closing bid and asked prices, (b) by appraising
common and preferred stocks traded on other United States national securities
exchanges or foreign securities exchanges as nearly as possible in the manner
described in (a) by reference to their principal exchange, including the
National Association of Securities Dealers National Market System, (c) by
appraising over-the-counter securities quoted on the National Association of
Securities Dealers NASDAQ system (but not listed on the National Market System)
at the bid price supplied through such system, (d) by appraising
over-the-counter securities not quoted on the NASDAQ system at prices supplied
by the pricing agent or brokers selected by the Adviser, if these prices are
deemed to be representative of market values at the regular close of business of
the New York Stock Exchange, (e) by appraising debt securities at prices
supplied by a pricing agent selected by the Adviser, whose prices reflect
broker/dealer supplied valuations and electronic data processing tech-
27
<PAGE>
MainStay High Yield Corporate Bond Fund
niques if those prices are deemed by the Adviser to be representative of market
values at the regular close of business of the New York Stock Exchange (f) by
appraising options and futures contracts at the last sale price on the market
where such options or futures are principally traded, and (g) by appraising all
other securities and other assets, including debt securities for which prices
are supplied by a pricing agent but are not deemed by the Adviser to be
representative of market values, but excluding money market instruments with a
remaining maturity of sixty days or less and including restricted securities and
securities for which no market quotations are available, at fair value in
accordance with procedures approved by the Trustees. Short-term securities which
mature in more than 60 days are valued at current market quotations. Short-term
securities which mature in 60 days or less are valued at amortized cost if their
term to maturity at purchase was 60 days or less, or by amortizing the
difference between market value on the 61st day prior to maturity and market
value on maturity date if their original term to maturity at purchase exceeded
60 days.
Events affecting the values of certain portfolio securities that occur between
the close of trading on the principal market for such securities (foreign
markets and over-the-counter markets) and the regular close of the New York
Stock Exchange will not be reflected in the Fund's calculation of net asset
value unless the Adviser believes that the particular event would materially
affect net asset value, in which case an adjustment would be made.
Forward Currency Contracts. A forward currency contract is an agreement to buy
or sell currencies of different countries on a specified future date at a
specified rate. During the period the forward currency contract is open, changes
in the value of the contract are recognized as unrealized gains or losses by
"marking to market" such contract on a daily basis to reflect the market value
of the contract at the end of each day's trading. When the forward currency
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transaction and
the Fund's basis in the contract. The Fund enters into forward currency
contracts in order to hedge its foreign currency denominated investments,
receivables and payables against adverse movements in future foreign exchange
rates.
The use of forward currency contracts involves, to varying degrees, elements of
market risk in excess of the amount recognized in the statement of assets and
liabilities. The contract or notional amounts reflect the extent of the Fund's
involvement in these financial instruments. Risks arise from the possible
movements in the foreign exchange rates underlying these instruments. The
unrealized appreciation/ depreciation on forward contracts reflects the Fund's
exposure at period end to credit loss in the event of a counterparty's failure
to perform its obligations.
28
<PAGE>
Notes to Financial Statements (unaudited) continued
Forward foreign currency contracts open at June 30, 1997:
<TABLE>
<CAPTION>
Value on Unrealized
Contract Trade Current Appreciation/
Amount Date Value (Depreciation)
============ =========== ========== ===============
Foreign Currency Sale Contracts
- -------------------------------
<S> <C> <C> <C> <C>
Canadian Dollar, expiring 10/21/97.............. C$ 7,500,000 $5,412,232 $5,473,562 $ (61,330)
Deutsche Mark, expiring 8/27/97................. DM 11,429,850 6,900,000 6,587,450 312,550
---------
Net Appreciation $ 251,220
=========
</TABLE>
- ----------
C$ Canadian Dollar.
DM Deutsche Mark.
Securities Sold Short. The Fund may engage in short sales as a method of hedging
declines in the value of securities owned. When the Fund enters into a short
sale, it must segregate the security sold short, or securities equivalent in
kind and amount to the securities sold, as collateral for its obligation to
deliver the security upon conclusion of the sale. A gain, limited to the price
at which the Fund sold the security short, or a loss, unlimited as to dollar
amount, will be recognized upon termination of a short sale if the market price
on the date the short position is closed out is less or greater, respectively,
than the proceeds originally received. Any such gain or loss may be offset,
completely or in part, by the change in the value of the hedged investments.
At June 30, 1997 there were no open short sales.
Restricted Securities. A restricted security is a security which has been
purchased through a private offering and cannot be resold to the general public
without prior registration under the Securities Act of 1933. Disposal of these
securities may involve time-consuming negotiations and expense, and prompt sale
at an acceptable price may be difficult.
The issuers of the securities will bear the costs involved in registration under
the Securities Act of 1933 and in connection with the disposition of such
securities. The Fund does not have the right to demand that such securities be
registered. The Fund may not invest more than 10% of its net assets in illiquid
securities.
29
<PAGE>
MainStay High Yield Corporate Bond Fund
Restricted securities held at June 30, 1997:
<TABLE>
<CAPTION>
Principal Percent
Acquisition Amount/ 6/30/97 of
Security Date Shares Cost Value Net Assets
======== ======== ========= ======== ========= =============
<S> <C> <C> <C> <C> <C>
AES Corp.
8.00%, due 6/26/03 6/26/97 $60,000,000 $ 60,000,000 $ 60,000,000 1.9%
Big V Supermarkets, Inc.
8.688%, due 12/31/50 4/10/97 9,600,000 9,515,618 9,552,000 0.3
GPA Group, PLC
Preferred Stock 3/6/96 30,000,000 9,862,500 15,450,000 0.5
Intertek Testing Services Ltd.
12.00%, due 11/8/07(a) 11/8/96 4,235,362 4,018,277 4,277,716 0.1
Warrants, expire 12/31/99 11/8/96 691 223,440 220,000 0.0(b)
IRI International Corp.
8.97%, due 3/31/02 6/27/97 5,000,000 5,015,625 5,015,750 0.2
12.27%, due 3/3/98 3/31/97 6,200,000 6,200,000 6,200,000 0.2
Kronos International, Inc.
5.051%, due 12/31/50 2/25/97 DM9,826,048 5,321,452 5,413,179 0.2
S-C Aircraft Holdings LLC
11.00%, due 1/1/03 3/20/97 $12,900,000 12,900,000 12,900,000 0.4
Titan Tire Corp.
7.00%, due 2/11/00 6/24/97 6,542,838 6,265,841 6,264,767 0.2
World Airways, Inc.
10.25% due 2/15/03 4/4/97 9,717,494 9,337,913 9,425,969 0.3
------------ ------------ ---
$128,660,666 $134,719,381 4.3%
============ ============ ===
</TABLE>
- ----------
(a) CIK ("Cash in Kind")--interest payment is made with cash or additional
securities.
(b) Less than one tenth of a percent.
DM Deutsche Mark
Financial Instruments with Concentration of Credit Risk. The Fund invests in
Loan Participations. When the Fund purchases a Participation, the Fund typically
enters into a contractual relationship with the lender or third party selling
such Participation ("Selling Participant"), but not with the Borrower. As a
result, the Fund assumes the credit risk of the Borrower, the Selling
Participant and any other persons interpositioned between the Fund and the
Borrower ("Intermediate Participants"). The Fund may not directly benefit from
the collateral supporting the Senior Loan in which it has purchased the
Participation. The Fund may be considered to have a concentration of credit risk
in the banking industry, since the Fund will only acquire Participations if the
Selling Participant and each Intermediate Participant is a financial
institution. The Fund held no Loan Participations at June 30, 1997.
30
<PAGE>
Notes to Financial Statements (unaudited) continued
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Investment income received by a Fund from foreign sources may be subject to
foreign income taxes withheld at the source.
Dividends and Distributions to Shareholders. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
monthly. Income dividends and capital gain distributions are determined in
accordance with Federal income tax regulations which may differ from generally
accepted accounting principles.
Security Transactions and Investment Income. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued daily except
when collection is not expected. Discounts on securities purchased for the Fund
are accreted on the constant yield method over the life of the respective
securities or, if applicable, over the period to the first call date.
Income from payment-in-kind securities is recorded daily based on the effective
interest method of accrual.
The Fund invests primarily in high yield bonds. These bonds may involve special
risks not commonly associated with investment in higher rated debt securities.
High yield bonds may be more susceptible to real or perceived adverse economic
and competitive industry conditions than higher grade bonds. Also, the secondary
market on which high yield bonds are traded may be less liquid than the market
for higher grade bonds.
Expenses. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when allocations of direct expenses can otherwise fairly be
made. The investment income and expenses (other than expenses incurred under the
Distribution Plan) and realized and unrealized gains and losses on investments
of the Fund are allocated to separate classes of shares based upon their
relative net asset value on the date the income is earned or expenses and
realized and unrealized gains and losses are incurred. Dividends on short
positions are recorded as an expense of the Fund on ex-dividend date.
Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
Note 3--Fees and Related Party Policies:
Investment Advisory and Administration Fees. MacKay-Shields Financial
Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an
Investment Advisory Agreement. MacKay-Shields is a regis-
31
<PAGE>
MainStay High Yield Corporate Bond Fund
tered investment adviser and an indirect wholly-owned subsidiary of New York
Life Insurance Company ("New York Life"). NYLIFE Distributors Inc. ("NYLIFE
Distributors"), an indirect wholly-owned subsidiary of New York Life, is the
Administrator for the Fund.
The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an annual
rate of the Fund's average daily net assets of 0.30% on assets up to $500
million and 0.275% on assets in excess of $500 million.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"). The
Fund, with respect to each class of shares, has adopted a Distribution Plan (the
"Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Class A Plan, the Distributor receives payments from the Fund at
an annual rate of 0.25% of the average daily net assets of the Fund's Class A
shares, which is an expense of the Class A shares of the Fund for distribution
or service activities as designated by the Distributor. Pursuant to the Class B
Plan, the Fund's Class B shares are subject to the payment of a monthly
distribution fee, which is an expense of the Class B shares of the Fund, at the
annual rate of 0.75% of the lesser of:
(a) the aggregate gross sales of the Fund's Class B shares since the inception
of the Fund (not including reinvestment of dividends or capital gains
distributions), less the aggregate net asset value of the Fund's Class B shares
exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or upon which such charge has been
waived; or (b) the average daily net assets of the Fund's Class B shares.
The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund. Service fee as shown on the statement of
operations represents the fees for both Class A shares and Class B shares.
The Plan provides that the distribution fee is payable to NYLIFE Distributors
regardless of the amounts actually expended by NYLIFE Distributors for
distribution of the Fund's shares and service activities.
NYLIFE Distributors anticipates that its actual distribution expenditures will
substantially exceed the distribution fee received by it during the initial
years of the operation of the Plan and that in later years, its expenditures may
be less than the distribution fee.
Sales Charges. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $150,002 for the six
months ended June 30, 1997. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges for redemption of Class B shares of
$1,177,514 for the six months ended June 30, 1997.
Trustees Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, NYLIFE Distribu-
32
<PAGE>
Notes to Financial Statements (unaudited) continued
tors or NYLIFE Securities, are paid an annual fee of $40,000 and $1,000 for each
Board and Audit Committee meeting attended plus reimbursement for travel and
out-of-pocket expenses. The Trust allocates this expense in proportion to the
net assets of the respective Funds.
Other. NYLIFE Distributors has received $125,467 for providing the Fund certain
transfer agency services for the period January 1, 1997, through April 30, 1997.
Effective May 1, 1997, MainStay Shareholder Services Inc. ("MSS"), an indirect
wholly owned subsidiary of New York Life Insurance Company, was appointed
Transfer, Dividend Disbursing and Shareholder Servicing Agent. MSS was paid
$29,246 for services rendered May 1, 1997, through June 30, 1997.
Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $47,028 for the six months ended
June 30, 1997.
Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the six months ended June 30, 1997 amounted to
$154,184.
Note 4--Purchases and Sales of Securities (in 000's):
During the six months ended June 30, 1997, purchases and sales of U.S.
Government securities were $138,699 and $56,020, respectively. Purchases and
sales of securities, other than U.S. Government securities, securities subject
to repurchase transactions and short-term securities, were $1,650,567 and
$1,240,763, respectively.
Note 5--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1997* December 31, 1996
==================== ====================
Class A Class B Class A Class B
======== ======== ======== ========
<S> <C> <C> <C> <C>
Shares sold ...................................................... 10,388 72,716 12,344 111,564
Shares issued in reinvestment of dividends and distributions ..... 453 7,419 869 18,686
-------- -------- -------- --------
10,841 80,135 13,213 130,250
Shares redeemed .................................................. (4,077) (26,106) (4,492) (36,876)
-------- -------- -------- --------
Net increase ..................................................... 6,764 54,029 8,721 93,374
======== ======== ======== ========
</TABLE>
- ----------
* Unaudited.
33
<PAGE>
The MainStay Funds
<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund graph indicating of companies in expanding markets and are willing to accept a higher
risk/reward of with strong growth potential level of risk for higher return potential
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in a portfolio that tracks You seek a conservative way to partici-
Equity Index Fund graph indicating the makeup and returns of the pate in the growth potential of stocks+
risk/reward of S&P 500*
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Offers broad diversification into You prefer the higher return potential
International Equity Fund graph indicating international stock markets with of international equities or want to
risk/reward of an emphasis on risk control add diversification to your domestic
Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Convertible Fund [Horizontal bar Invests in convertible securities for You want income from securities that
As of 6/2/97, this Fund graph indicating a special blend of long-term growth may offer growth potential if converted
was closed to new investors. risk/reward of potential and dividend income into common stock
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Balances current income with growth You seek a combination of income and
Total Return Fund graph indicating opportunities by investing in stocks, growth potential and want to manage
risk/reward of bonds, and money market instruments risk through diversification
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks undervalued stocks with You seek to maximize total return from
Value Fund graph indicating attractive dividends and a stimulus securities which may have more poten-
risk/reward of for positive change tial than the market currently sees
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's.
+ The original investment is guaranteed provided it is held for 10 years with
all dividend and capital gain distributions reinvested. If shares are
redeemed prior to or after the one-day guarantee date, the investor loses
the benefit of the guarantee with respect to those shares.
++ Investments in foreign securities may be subject to greater risks than
domestic investments. These risks include currency fluctuations, changes in
U.S. or foreign tax or currency laws, and changes in monetary policies and
economic and political conditions in foreign countries.
(S) While individual securities owned by the Government Fund may be guaranteed
by the U.S. government and its agencies, the share price of the Fund is not
guaranteed and will fluctuate with market conditions.
|| Certain of the Fund's investments may be speculative.
# Investments in the Money Market Fund are neither insured nor guaranteed by
the U.S. government and there is no assurance that the Fund will be able to
maintain a stable net asset value of $1.00 per share; investment returns
will vary with market conditions.
** A small portion of the Fund's income may be subject to state and local
taxes and the Alternative Minimum Tax. Capital gains, if any, may also be
taxed.
34
<PAGE>
<TABLE>
<CAPTION>
INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Seeks a high level of current income You are seeking to combine high
Government Fund graph indicating consistent with safety of principal current income and safety of principal
risk/reward of primarily from U.S. government
Fund] securities(S)
- ------------------------------------------------------------------------------------------------------------------------------------
HIGH YIELD [Horizontal bar An aggressive high-yield bond You want to maximize current income
CORPORATE BOND FUND graph indicating fund that is actively managed for and can accept the higher risk of
risk/reward of maximum current income|| securities with high yield potential
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current yields and You prefer the higher return potential
International Bond Fund graph indicating competitive total return from non- of international bonds or want to
risk/reward of U.S. bonds with an emphasis on add diversification to your domestic
Fund] risk control investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating stability of principal, and liquidity, competitive yields on cash you're plan-
risk/reward of with free checkwriting# ning to spend or invest in the near future
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks current income and competi- You seek to combine the return potential
Strategic Income Fund graph indicating tive overall return by investing in of high-grade, high-yield,|| and inter-
risk/reward of a diversified portfolio of domestic national bonds and want to manage risk
Fund] and foreign debt securities++ through multimarket diversification
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are a California resident and want to
California Tax Free Fund graph indicating from both federal and California keep more of what you earn by invest-
risk/reward of income taxes consistent with ing for income that's double tax free**
Fund] preservation of capital**
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are a New York State or City resident
New York Tax Free Fund graph indicating from federal, New York State, and and want to keep more of what you earn
risk/reward of New York City income taxes consis- with income that's double or triple tax
Fund] tent with preservation of capital** free**
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are in a high federal income tax
Tax Free Bond Fund graph indicating from regular federal income tax con- bracket or want to pay less of your
risk/reward of sistent with preservation of capital** investment income to the IRS
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A word about risk and reward
The "thermometers" in the tables above show how much risk the investor must
assume and the related return potential. Generally speaking, investments with
higher return potential also carry higher risks. So, the longer the indicator
bar, the higher the risk and reward potential of the Fund.
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send any money. Shares
must be offered in the investor's state of residence.
35
<PAGE>
- --------------------------------------------------------------------------------
MAINSTAY
High Yield Corporate Bond Fund
- --------------------------------------------------------------------------------
[GRAPHIC]
Semiannual Report
June 30, 1997
Unaudited
[LOGO] MAINSTAY(R)
FUNDS
OFFICERS & TRUSTEES
Alice T. Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
[LOGO] MAINSTAY(R) FUNDS
NYLIFE Distributors Inc.
Morris Corporate Center, Building A
300 Interpace Parkway
Parsippany, New Jersey 07054
Administrator & Distributor of The MainStay Funds
http://www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly owned subsidiary of
New York Life Insurance Company.
[LOGO] NEW YORK LIFE
This report is provided for the information of shareholders of the MainStay High
Yield Corporate Bond Fund. It may be given to others only when preceded or
accompanied by an effective MainStay Funds prospectus. This report does not
offer to sell any securities or solicit orders to buy them.
(C)1997. All rights reserved. MSSA09-08/97
[GRAPHIC]
<PAGE>
Table of Contents
Chairperson's Letter 2
MainStay International Bond Fund Highlights 4
$10,000 Invested in the MainStay
International Bond Fund versus Salomon Brothers
Non-U.S. Dollar World Government Bond
Index--Class A & Class B Shares 5
Portfolio Management Discussion and Analysis 6
Year-by-Year & Six-Month Performance 7
Diversification by Country--Top 5 8
Quality Breakdown 9
Returns & Lipper Rankings 10
Top 10 Holdings 11
10 Largest Purchases 11
10 Largest Sales 11
Portfolio of Investments 12
Unaudited Financial Statements 16
Notes to Financial Statements 20
The MainStay Funds 28
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
Chairperson's Letter
After a remarkable six-year period of expansion, the U.S. economy continued to
grow throughout the first half of 1997. For most investors, the overall impact
was positive, but there were some rough seas along the way.
As the stock market made gains early in the year, concerns about the possibility
of impending inflation brought increased price volatility. In late March, the
Federal Reserve Board moved to raise interest rates in an effort to slow
economic growth. Although this preemptive strike helped keep inflation in check,
the initial reaction from both the stock and bond markets was negative. As a
result, bond prices faltered and stocks tumbled more than 9% from their peak
before both markets began to stabilize.
As employment figures, earnings estimates, and other indicators began to suggest
that economic growth was slowing in the second quarter, the stock market not
only recovered lost ground, but soared to record highs. With higher valuations,
however, the market became increasingly volatile, reacting severely to any news
that could signal a shift in buying patterns or interest rates.
Positive performance, emerging concerns
Despite the volatility, domestic stock and bond markets closed the first half of
1997 with positive returns. While Malaysia and Singapore had negative results,
most international markets performed well. Japan began to climb out of its
recession, and Hong Kong advanced as the market realized the investment
potential of Chinese unification.
In Europe, low interest rates and ongoing restructuring helped corporations
improve sales and earnings. Economic reforms drew countries closer to European
Monetary Union, and political victories in France and England focused attention
on the need to reduce unemployment and keep inflation under control. In
Australia and New Zealand, bond markets rallied as the central banks engineered
lower interest rates.
Given these results, many investors are once again celebrating their good
fortune. The underlying volatility, however, should serve to remind us that the
level of growth we've enjoyed for more than six years is not typical market
behavior.
Certainly no one can predict what will happen next, so it's important to keep
recent performance in perspective. We believe that having realistic
expectations, as well as a long-range plan and diversified investments can help
you work toward achieving your goals, wherever the markets may move.
Solid team approach
At MainStay(R), we believe our risk-averse approach can help provide reassurance
to many investors, particularly in uncertain times. Each MainStay Fund is
managed by a team of experienced professionals who employ disci-
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
plined investment strategies to seek competitive returns with careful attention
to downside risk. Our team approach offers investors a combination of
experience, insight, and market perspective that few individuals could provide
on their own. It also helps provide important checks and balances in security
selection, market evaluation, and overall accountability.
Our Fund managers believe that strong companies tend to get stronger in up
markets and perform better than average when the markets go down. Using
selection criteria appropriate to the individual Funds they manage, they may
look for specific catalysts that are likely to stimulate growth, enhance value,
or increase yield without taking on unnecessary risk.
Looking forward
As we move into the second half of 1997, we expect that an intensified focus on
inflation, interest rates, and corporate earnings will account for much of the
momentum driving the market. Regardless of how events unfold, you can be
confident that we will hold true to our disciplined management approach.
At MainStay, we believe that having a close relationship with your Registered
Representative is one of the best ways to keep your long-term focus in any
market environment. Therefore, we urge you to speak with your Registered
Representative regularly--whether the market happens to be up or down--so he or
she can understand your needs and help keep you on a steady course.
While we've seen positive results for the first half of the year, we remain
somewhat cautious. Whatever the future brings, we'll continue to provide the
information, service, and support you can consider when making decisions--and
the prudent management you depend on to pursue your long-range goals.
Sincerely,
/s/ Alice T. Kane
Alice T. Kane
July 1997
- --------------------------------------------------------------------------------
3
<PAGE>
MainStay International Bond Fund Highlights
MARKET HIGHLIGHTS
FOR THE 6 MONTHS ENDED 6/30/97
- --------------------------------------------------------------------------------
o With the exception of Japan, most international bond markets outperformed
the United States in local currency terms.
o A strengthening dollar translated into negative returns for U.S. investors
in several European markets, while Japan and the U.K. provided positive
returns after currency translations.
o Emerging market debt performed well during the reporting period, as did
dollar-bloc bonds in Australia and New Zealand.
o The bond market rewarded the U.K. for establishing an independent central
bank with a bond rally, even as rates increased.
- --------------------------------------------------------------------------------
FUND HIGHLIGHTS FOR THE
6- AND 12-MONTH PERIODS ENDED 6/30/97
- --------------------------------------------------------------------------------
o One-year total returns of 8.67% and 8.06% for Class A shares and Class B
shares, respectively, excluding all sales charges, as of 6/30/97.
o Adding emerging market debt, dollar-bloc, and U.K. debt and increasing the
duration of the Fund's investment portfolio were major contributors to the
Fund's results.
o While selected currency hedging helped the Fund, exposure to core European
currencies negatively impacted the Fund's performance.
o Both share classes outperformed the average Lipper* international income
fund for the six months ended 6/30/97.
- --------------------------------------------------------------------------------
- ----------
* See footnote + and table on page 10 for more information on Lipper
Analytical Services, Inc.
4
<PAGE>
$10,000 Invested in the MainStay International
Bond Fund versus Salomon Brothers Non-U.S.
Dollar World Government Bond Index
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Salomon Brothers
MainStay Non-U.S. Dollar
International World Government
Period-end Bond Fund Bond Index*
- --------------------------------------------------------------------------------
<S> <C> <C>
9/13/94 $ 9,550.00 $10,000.00
12/94 $ 9,569.01 $10,256.00
12/95 $11,356.50 $12,261.00
12/96 $12,934.60 $12,761.00
6/97 $12,955.00 $12,364.00
</TABLE>
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Salomon Brothers
MainStay Non-U.S. Dollar
International World Government
Period-end Bond Fund Bond Index*
- --------------------------------------------------------------------------------
<S> <C> <C>
9/13/94 $10,000.00 $10,000.00
12/94 $10,020.00 $10,256.00
12/95 $11,819.40 $12,261.00
12/96 $13,371.40 $12,761.00
6/97 $12,952.00 $12,364.00
</TABLE>
- ----------
The Class A graph assumes an initial investment of $10,000 made on 9/13/94
reflecting the effect of the 4.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,550 and includes the historical
performance of the Class B shares for periods from inception (9/13/94)
through 12/31/94. The Class B graph assumes an initial investment of
$10,000 made on 9/13/94. Returns reflect the Contingent Deferred Sales
Charge (CDSC) of 3.0%, as it would apply for the period shown. (The $10,000
invested in the Salomon Brothers Non-U.S. Dollar World Government Bond
Index begins on 8/31/94.) All results include reinvestment of distributions
at net asset value and the change in share price for the stated period.
Past performance is no guarantee of future results.
* The Salomon Brothers Non-U.S. Dollar World Government Bond Index is an
unmanaged index generally considered to be representative of the world bond
market.
[GRAPHIC]
5
<PAGE>
Portfolio Management Discussion and Analysis
During the first six months of 1997, most international bond markets
outperformed the United States in local currency terms. Unfortunately, a
--------------------
strengthening dollar turned positive results into negative ones for U.S.
investors in most international markets.
Japan and the U.K. were notable exceptions. Japanese bonds underperformed U.S.
bonds in local terms, but a strengthening yen led to outperformance in U.S.
dollar terms. In the United Kingdom, the new labor government gave the Bank of
England independent central bank status. Although the bank moved to raise rates,
the bond markets rallied on confidence that inflation could finally be
controlled without forcing a recession.
Emerging markets had outstanding performance in the first half of the year, with
- ----------------
emerging-market dollar bonds returning over 10%. Dollar-bloc countries such as
-----------
Australia and New Zealand also had strong markets as their economies slowed and
interest rates fell. Core European markets generally did well in local terms,
although France is still adjusting to new socialist leadership. Achieving
European Monetary Union remains a major theme, although the long-term impact has
- -----------------------
yet to be seen.
On the currency front, the strengthening U.S. dollar relative to core European
currencies represented a key risk factor. At the same time, the Japanese yen
offered opportunities as it strengthened relative to the dollar. As of June 30,
Canadian dollars were extremely inexpensive and may offer attractive
opportunities going forward.
Given this context, how did the MainStay International Bond Fund do over the
first half of 1997?
The MainStay International Bond Fund returned 0.16% and -0.14% for Class A
shares and Class B shares, respectively, excluding all sales charges, for the
six months ended 6/30/97. While these numbers may seem low, the Fund
outperformed its benchmark, the Salomon Brothers Non-U.S. Dollar World
Government Bond Index,* which returned -3.12% for the first half of the year. It
also outperformed the average Lipper+ international income fund, which returned
- -1.19% over the same period.
What did you do seeking to achieve these results?
We took a number of significant steps during the first half of 1997. The first,
and perhaps most important, was to increase the Fund's exposure to emerging
markets from zero to about fifteen percent of its investment portfolio. We
invested in Brazil, Venezuela, Mexico, Argentina, Russia, and just recently, in
South Africa. The results were very positive.
Why did these markets do so well?
Mexico and Argentina have come out of recession and are now quite strong. In
fact, we believe Argentina could possibly see its debt move to investment grade.
Venezuela is benefiting from an oil boom, and South Africa may lower interest
rates in the near future, which we believe could have a positive impact on the
Fund in the second half of the year.
[GRAPHIC]
Local currency
terms
- --------------
Returns expressed in local currency terms show what an investor using that
currency would have earned, without any adjustment for differences in currency
values. Returns expressed in U.S. dollar terms reflect any differences in the
relative value of the local currency and the U.S. dollar.
Emerging markets
- ----------------
Countries with smaller or more recently established capital markets.
Dollar bloc
- -----------
Major markets, including Canada, Australia, New Zealand, Hong Kong, and others,
whose currencies are tied to the U.S. dollar and tend to move in the same
general direction as the U.S. dollar relative to other currencies.
- ----------
* See footnote on page 5 for more information on the Salomon Brothers
Non-U.S. Dollar World Government Bond Index.
+ See footnote and table on page 10 for more information on Lipper Analytical
Services, Inc.
6
<PAGE>
YEAR-BY-YEAR & SIX-MONTH PERFORMANCE
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Period-end Total Return %
- ----------------------------------------
<S> <C>
12/94 0.20 Class B
12/95 18.68 Class A
12/95 17.96 Class B
12/96 13.90 Class A
12/96 13.13 Class B
6/97 0.16 Class A
6/97 -0.14 Class B
</TABLE>
- ----------
See footnote * on page 10 for more information on performance.
What other steps did you take?
We bought dollar-bloc bonds in Australia and New Zealand, starting from zero in
New Zealand. These were two of the top performing international markets, up
about 6% and 5%, respectively, in local terms during the first half of the year.
We also strengthened the Fund's holdings in the U.K., which rallied about 6% in
local terms, even though interest rates went up. While their U.S. dollar return
was lower, it was still ahead of U.S. bonds and highly positive for the Fund. In
addition, our purchases lengthened the duration of the Fund, which also had a
--------
positive impact on performance.
What securities did you sell during the first half of the year?
We reduced the Fund's holdings in Canadian bonds. The market had rallied, the
economy had been in recession, but gross domestic product is now in the 3% to 4%
range. With interest rates at low levels, we thought it would be prudent to sell
and invest elsewhere, which benefited investors.
We also reduced the Fund's holdings in European bonds in Austria, France, Italy,
and Spain. Austria's yield spreads to German bonds flattened to the point that
-------------
we felt the Fund would be better off in more liquid German securities. France,
which was going through political upheaval with a conservative president and a
socialist parliament, offered no value in our opinion. In Italy and Spain,
spreads had also narrowed relative to German bonds, so we felt we could achieve
better returns by investing elsewhere, and we did.
What happened on the currency front?
There were really two sides to the currency story in the first half of the year.
First, there was the rising U.S. dollar, which took away some of the Fund's
profits in European markets where we were insufficiently hedged. For example,
------
Germany was up about 3% in local terms, but down 8% in unhedged U.S. dollar
terms. Although we carried partial hedges on many of the Fund's positions, we
would have done better hedging more of the Fund's European
[GRAPHIC]
European Monetary
Union
- -----------------
A proposed system that would allow participating European countries to operate
with a common currency or monetary unit.
Duration
- --------
Equals the weighted average time until bond investors recover their investment.
It is a measurement of interest-rate risk.
Yield spread
- ------------
The difference in yield between securities in different markets, such as Germany
and Spain; different market sectors, such as Treasuries and corporate bonds; or
between different securities in a single sector, such as corporate bonds with
different credit ratings.
7
<PAGE>
DIVERSIFICATION BY COUNTRY--TOP 5 AS OF 6/30/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Country Percentage
- -------------------------------------
<S> <C>
United States 15.7%
Germany 15.0%
United Kingdom 11.4%
Italy 8.3%
Canada 5.9%
All Other 43.7%
</TABLE>
- ----------
Actual percentages will vary over time.
currency exposure throughout the first half of the year.
The other side of the currency story was finding opportunities. While we have
carefully avoided Japanese bonds, we spotted an opportunity to increase the
Fund's exposure to Japanese yen-denominated money market instruments. This was a
tactical way to participate in the yen's increasing strength relative to the
dollar. We've since closed out those positions and as of the end of the second
quarter, the Fund has no yen exposure. But the net effect was positive.
Although we sold Canadian bonds, we bought Canadian dollars, increasing the
Fund's exposure throughout the second quarter. We believe the currency
represents attractive value and that rising Canadian interest rates should
support the currency going forward. So this decision should be positive for the
Fund in the second half of the year.
It sounds like you're being more aggressive in seeking currency opportunities.
That's right. We've been seeking ways to improve the Fund's currency management
and make the most of market opportunities. The yen and Canadian dollar moves are
just two examples of how stronger currency management has added value to the
Fund.
What other risks did investors face during the reporting period?
As you know, investments in foreign securities may be subject to greater risks
than domestic investments. These risks include currency fluctuations, changes in
U.S. or foreign tax or currency laws, and changes in monetary policies and
economic and political conditions in foreign countries.
To help manage these risks, we seek broad geographic diversification to limit
---------------
the Fund's exposure to any single market. Since emerging markets may carry
additional risk, we primarily purchased dollar bonds or deutsche mark bonds in
several of
[GRAPHIC]
Hedging/Currency
management
- ----------------
An investment strategy that seeks to reduce the effects of currency fluctuations
on investor returns. There can be no assurance that currency hedging will be
beneficial to investors.
International
diversification
- ---------------
Purchasing securities in several international markets, which may react
differently to economic, monetary, and market trends. Diversification may help
reduce investment risk.
8
<PAGE>
these countries. Anticipating potential difficulties after the Mexican
elections, we pared back the Fund's exposure by selling Brady bonds.
Unfortunately, these bonds have done well, so our prudence had a slightly
negative impact. With rates rising in the U.K., we're becoming less bullish and
may cut back there if this trend continues. We don't believe we can effectively
manage the Fund without carefully managing risk.
What's your outlook going forward?
In South Africa, we expect the central bank to lower rates by 200 basis points
------------
by year end. While that will have a tremendous effect on the local market, the
Fund's South African holdings represent only about 2% of the Fund and some of
that is in dollar bonds. So the impact on the Fund may be modest. We're looking
forward to European Monetary Union, but can't predict how the bond markets will
react, if and when it occurs.
Otherwise, we have a positive view of the bond markets, as long as there's
moderate growth and low inflation. Whatever the future may bring, we'll seek to
provide competitive overall return commensurate with an acceptable level of risk
by investing in a wide variety of non-U.S. debt securities, primarily those
issued by foreign governments.
Joseph Portera
Portfolio Manager
QUALITY BREAKDOWN AS OF 6/30/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Percentage
- -----------------------------------------------
<S> <C>
AAA 39.7%
AA 11.2%
A 17.1%
BBB 2.6%
BB 8.2%
B 9.3%
Government Agencies 2.8%
Cash, Equivalents &
Other Assets, less Liabilities 9.1%
</TABLE>
- ----------
Actual percentages will vary over time. Bond quality ratings provided by
Standard & Poor's.
See the prospectus for details.
[GRAPHIC]
Basis point
- -----------
One hundredth of one percent in the yield of an investment, i.e., 100 basis
points equals 1%.
Investments in foreign securities may be subject to greater risks than domestic
investments. These risks include currency fluctuations, changes in U.S. or
foreign tax or currency laws, and changes in monetary policies and economic and
political conditions in foreign countries.
9
<PAGE>
[GRAPHIC]
Returns & Lipper Rankings as of 6/30/97
<TABLE>
<CAPTION>
Fund average annual total returns*
- --------------------------------------------------------------------------------
1 year Life of Fund through 6/30/97
<S> <C> <C>
Class A 8.67% 11.51%
Class B 8.06% 10.88%
- --------------------------------------------------------------------------------
<CAPTION>
Fund SEC returns*
- --------------------------------------------------------------------------------
1 year Life of Fund through 6/30/97
<S> <C> <C>
Class A 3.78% 9.69%
Class B 3.06% 9.98%
- --------------------------------------------------------------------------------
<CAPTION>
Fund Lipper+ rankings & Lipper category returns as of 6/30/97
1 year Life of Fund through 6/30/97
<S> <C> <C>
Class A 15 out of n/a
43 funds
Class B 16 out of 7 out of
43 funds 25 funds
Average Lipper
international
income fund 6.39% 9.04%
- --------------------------------------------------------------------------------
<CAPTION>
Fund per share net asset values & distributions for the six months ended 6/30/97
- --------------------------------------------------------------------------------
NAV 6/30/97 Income Capital Gains
<S> <C> <C> <C>
Class A $10.65 $0.3120 $0.0000
Class B $10.69 $0.2700 $0.0000
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested. Performance figures
reflect the assumption of certain Fund expenses by the Fund's administrator
and adviser. Had these expenses not been assumed, total return figures
would have been lower. This expense limitation may be terminated or revised
at any time.
Class A shares, first offered to the public on 1/3/95, are sold with a
maximum initial sales charge of 4.5% and an annual 12b-1 fee of .25%.
Performance figures for this class include the historical performance of
the Class B shares for periods from inception (9/13/94) up to 12/31/94.
Performance data for the two classes after this date vary based on
differences in their expense structures. Class B shares of the Fund are
sold with no initial sales charge, but are subject to a maximum CDSC of up
to 5% if shares are redeemed during the first 6 years of purchase and an
annual 12b-1 fee of up to 1%.
+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales
charges. Lipper averages listed above are not class specific. Life of Fund
return is from the period of the Class B shares' initial offering through
6/30/97. The Fund's Class A shares were first offered to the public on
1/3/95; Class B shares on 9/13/94.
10
<PAGE>
Top 10 Holdings as of 6/30/97
<TABLE>
<CAPTION>
HOLDING COUNTRY AMOUNT
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Bonos del Tesoro, 8.75%, due 5/9/02 United States $1,095,876
Republic of Brazil, 6.00%, due 9/15/13 United States 960,937
Nykredit, Series ANN, 6.00%, due 10/1/26 Denmark 874,010
United Kingdom Treasury Bond, 10.00%, due 2/26/01 United Kingdom 863,335
International Bank of Reconstruction & Development,
7.125%, due 4/12/05 Germany 823,255
New Zealand Government, 6.50%, due 2/15/00 New Zealand 778,853
Bayerische Landesbank, 7.875%, due 12/7/06 United Kingdom 775,430
Ministry Finance Russia, 9.00%, due 3/25/04 Germany 772,760
United Mexican States, Series B, 6.25%, due 12/31/19 United States 771,875
Buoni Poliennali del Tesoro, 12.00%, due 5/1/02 Italy 668,782
- ----------------------------------------------------------------------------------------
10 Largest Purchases for the six months ended 6/30/97
<CAPTION>
AMOUNT
SECURITY COUNTRY OF PURCHASE
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Australian Government, due 4/15/00--2/15/06 Australia $3,541,522
Republic of Argentina, due 11/1/99--3/31/23 United States 3,281,029
Buoni Poliennali del Tesoro, due 8/1/97--11/1/26 Italy 2,586,826
United Kingdom Treasury Bonds, due 2/26/01--12/7/15 United Kingdom 2,246,558
Republic of Brazil, due 11/5/01--4/15/24 United States 1,726,569
Ministry Finance Russia, due 11/27/01--3/25/04 Germany 1,518,293
Republic of Venezuela, due 12/18/07--3/31/20 United States 1,426,875
United Mexican States, Series B, due 3/31/08--12/31/19 United States 1,200,313
Bonos del Tesoro, due 5/9/02 United States 1,095,876
New Zealand Government, due 2/15/00--3/15/02 New Zealand 938,448
- ----------------------------------------------------------------------------------------
<CAPTION>
10 Largest Sales for the six months ended 6/30/97
- ----------------------------------------------------------------------------------------
AMOUNT
SECURITY COUNTRY OF SALE
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Buoni Poliennali del Tesoro, due 8/1/97--11/1/26 Italy $3,882,791
Australian Government, due 4/15/00--2/15/06 Australia 3,880,326
Republic of Argentina, due 11/1/99--3/31/23 United States 2,970,153
United Kingdom Treasury Bonds, due 2/26/01--12/7/15 United Kingdom 2,767,820
Kingdom of Denmark, due 11/15/98--11/10/24 Denmark 1,762,521
Republic of Austria, due 3/22/99--1/24/05 Austria 1,422,767
Canadian Government, due 9/1/00--12/1/06 Canada 1,243,316
Swedish Government, due 5/5/03--4/20/09 Sweden 928,250
France Obligations Assimilables du Tresor,
due 11/12/98--4/25/05 France 798,790
Republic of Brazil, due 11/5/01--4/15/24 United States 790,404
- ----------------------------------------------------------------------------------------
</TABLE>
[GRAPHIC]
- ----------
This breakdown is provided for informational purposes only. The Fund's holdings
may change daily. All purchases and sales are aggregated by issuer. A
shareholder owns shares of the Fund but does not own a direct interest in any of
the specific securities listed. Short-term securities are excluded. See
Portfolio of Investments for specific type of security held.
11
<PAGE>
MainStay International Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
===============================
<S> <C> <C>
LONG-TERM BONDS (90.9%)+
BRADY BONDS (7.8%)
UNITED STATES (7.8%)
Republic of Brazil
6.00%, due 9/15/13 .............. $ 1,250,000 $ 960,937
Republic of Venezuela
Series W-A
6.75%, due 3/31/20
(call date 10/18/97) (a) ........ 750,000 590,156
Series W-A
6.813%, due 3/31/20
(call date 10/23/97) (a)(d) ..... 250,000 220,938
United Mexican States
Series B
6.25%, due 12/31/19
(call date 8/14/97) (b) ......... 1,000,000 771,875
----------
Total Brady Bonds
(Cost $2,480,156) ............... 2,543,906
----------
CORPORATE BONDS (19.2%)
DENMARK (2.7%)
Nykredit
Series ANN
6.00%, due 10/1/26 .............. DK 6,379,000 874,010
----------
GERMANY (8.3%)
Bayerische VBK New York
4.50%, due 6/24/02 .............. DM 1,150,000 653,453
Depfa Bank
Series 436
5.75%, due 3/4/09 ............... 500,000 281,637
International Bank of
Reconstruction &
Development
7.125%, due 4/12/05 (c) ......... 1,300,000 823,255
Ministry Finance Russia
9.00%, due 3/25/04 .............. 1,315,000 772,760
Venezuela Synthetic Sovereign
Investments Ltd.
10.125%, due 12/29/03
(call date 12/28/01) ............ 260,000 154,797
----------
2,685,902
----------
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
<TABLE>
<CAPTION>
Principal
Amount Value
===============================
<S> <C> <C>
SWEDEN (3.1%)
Banque Nationale de Paris
Medium-Term Notes Series E
11.00%, due 11/4/99 ............. SK 3,050,000 $ 437,833
Stadshypotek AB
Series 1553
10.00%, due 12/20/00 ............ 4,000,000 584,404
----------
1,022,237
----------
UNITED KINGDOM (5.1%)
Abbey National Treasury
8.00%, due 4/2/03 .............. (Pound) 191,000 324,622
Bayerische Landesbank
7.875%, due 12/7/06 ............. 452,000 775,430
European Investment Bank
8.75%, due 8/25/17 .............. 300,000 565,524
----------
1,665,576
----------
Total Corporate Bonds
(Cost $6,450,620) ............... 6,247,725
----------
GOVERNMENTS & FEDERAL AGENCIES (60.9%)
ARGENTINA (1.0%)
Argentina Bocon Previs
Series Pre-1
3.242%, due 4/1/01
(call date 8/1/97) (d) .......... AP 337,616 318,610
----------
AUSTRALIA (5.8%)
Australian Government
Series 904
9.00%, due 9/15/04 .............. A$ 741,000 622,030
Series 1002
10.00%, due 10/15/02 ............ 506,000 437,611
Fannie Mae
Medium-Term Notes Series E
6.50%, due 7/10/02 .............. 670,000 494,392
Queensland Treasury Corp. .........
8.00%, due 5/14/03 .............. 295,000 234,584
8.00%, due 9/14/07 .............. 125,000 98,938
----------
1,887,555
----------
CANADA (5.9%)
Alberta Government
Series UB
9.60%, due 7/7/98 ............... C$ 650,000 495,779
Canadian Government
Series A76
9.00%, due 6/1/25 ............... 25,000 22,810
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE>
Portfolio of Investments June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
Principal
Amount Value
===============================
<S> <C> <C>
GOVERNMENTS & FEDERAL AGENCIES (Continued)
CANADA (Continued)
Canadian Government (Continued)
Series H74
10.00%, due 6/1/08 .............. C$ 160,000 $ 147,904
Series A33
11.50%, due 9/1/00 .............. 230,000 196,170
Province of Ontario
7.25%, due 9/27/05 .............. 835,000 634,966
9.75%, due 10/29/01 ............. 133,000 110,546
Province of Quebec
7.75%, due 3/30/06 .............. 375,000 293,029
----------
1,901,204
----------
DENMARK (2.8%)
Kingdom of Denmark
7.00%, due 12/15/04 ............. DK 3,375,000 545,387
8.00%, due 11/15/01 ............. 2,220,000 375,919
----------
921,306
----------
EUROPEAN MONETARY UNION (1.7%)
France Obligations Assimilables
du Tresor
7.50%, due 4/25/05 .............. ECU 430,000 538,736
----------
FRANCE (5.7%)
France Obligations Assimilables
du Tresor
7.50%, due 4/25/05 .............. FF 1,070,000 207,606
8.25%, due 2/27/04 .............. 2,262,000 453,408
8.50%, due 3/28/00 .............. 2,790,000 531,110
8.50%, due 11/25/02 ............. 2,900,000 581,737
8.50%, due 12/26/12 ............. 420,000 89,681
----------
1,863,542
----------
GERMANY (6.7%)
Province of Ontario
6.25%, due 1/13/04 .............. DM 500,000 301,572
Republic of Deutschland
Series 94
6.25%, due 1/4/24 (c) ........... 420,000 234,496
Treuhandanstalt
6.25%, due 3/4/04 ............... 845,000 514,895
6.50%, due 4/23/03 .............. 995,000 615,775
7.375%, due 12/2/02 (c) ......... 800,000 514,377
----------
2,181,115
----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
===============================
<S> <C> <C>
IRELAND (2.6%)
Irish Government
6.25%, due 4/1/99 (c) ........... IP 155,000 $ 234,770
8.00%, due 8/18/06 .............. 110,000 181,961
8.25%, due 8/18/15 (c) .......... 58,000 100,143
8.75%, due 7/27/97 (c) .......... 95,000 143,590
8.75%, due 9/30/12 (c) .......... 95,000 171,050
----------
831,514
----------
ITALY (8.3%)
Buoni Poliennali del Tesoro
7.25%, due 11/1/26 .............. IL 245,000,000 142,575
7.50%, due 10/1/99 .............. 635,000,000 384,505
8.50%, due 8/1/97 ............... 245,000,000 143,514
8.50%, due 1/1/04 ............... 890,000,000 573,142
9.50%, due 2/1/01 ............... 215,000,000 139,365
10.50%, due 7/15/00 ............. 975,000,000 640,946
12.00%, due 5/1/02 .............. 930,000,000 668,782
----------
2,692,829
----------
NEW ZEALAND (2.8%)
Fannie Mae
Medium-Term Notes Series E
7.25%, due 6/20/02 .............. N$ 200,000 133,516
New Zealand Government
6.50%, due 2/15/00 .............. 1,153,000 778,853
----------
912,369
----------
SOUTH AFRICA (1.6%)
Republic of South Africa
Series 150
12.00%, due 2/28/05 ............. ZAR 2,700,000 530,770
----------
SPAIN (3.9%)
Spanish Government
7.35%, due 3/31/07 .............. SP 16,400,000 119,476
7.90%, due 2/28/02 .............. 29,300,000 218,215
8.30%, due 12/15/98 ............. 4,000,000 28,380
10.50%, due 10/30/03 ............ 66,300,000 559,275
11.30%, due 1/15/02 ............. 41,490,000 346,210
----------
1,271,556
----------
SWEDEN (2.0%)
Swedish Government
Series 1035
6.00%, due 2/9/05 ............... SK 800,000 101,344
Series 1034
9.00%, due 4/20/09 .............. 2,700,000 412,172
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
MainStay International Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
===============================
<S> <C> <C>
GOVERNMENTS & FEDERAL AGENCIES (Continued)
SWEDEN (Continued)
Swedish Government (Continued)
Series 1030
13.00%, due 6/15/01 ............. SK 900,000 $ 146,771
----------
660,287
----------
UNITED KINGDOM (6.3%)
Fannie Mae
Medium-Term Notes Series E
6.875%, due 6/7/02 .............. (Pound) 180,000 295,762
United Kingdom Treasury Bonds
8.00%, due 12/7/15 .............. 190,000 344,380
9.50%, due 4/18/05 (c) .......... 285,000 541,028
10.00%, due 2/26/01 (c) ......... 477,000 863,335
----------
2,044,505
----------
UNITED STATES (3.8%)
Bonos del Tesoro
8.75%, due 5/9/02 ............... $ 1,095,000 1,095,876
Petroleos Mexicanos
6.813%, due 3/8/99 (d) .......... 150,000 149,625
----------
1,245,501
----------
Total Governments & Federal Agencies
(Cost $19,994,104) .............. 19,801,399
----------
YANKEE BONDS (3.0%)
UNITED STATES (3.0%) Grupo Televisa S.A.
11.875%, due 5/15/06 ............ $ 435,000 490,462
Republic of South Africa
8.50%, due 6/23/17 .............. 485,000 479,229
----------
Total Yankee Bonds
(Cost $964,104) ................. 969,691
----------
Total Long-Term Bonds
(Cost $29,888,984) .............. 29,562,721
----------
OPTIONS (0.3%)
UNITED STATES (0.3%)
U.S. Dollar Call/Deutsche Mark Put
Strike price DM 1.695
Expire 8/25/97 .................. $ 2,300,000 66,652
<CAPTION>
Principal
Amount Value
============================
<S> <C> <C>
UNITED STATES (Continued)
U.S. Dollar Call/Deutsche Mark Put (Continued)
Strike price DM 1.745
Expire 9/15/97 ............................... $ 3,010,000 $ 41,035
-----------
Total Options
(Cost $76,836) ............................... 107,687
-----------
SHORT-TERM INVESTMENT (0.8%)
COMMERCIAL PAPER (0.8%)
UNITED STATES (0.8%)
Merrill Lynch & Co. Inc.
6.22%, due 7/1/97 ............................ $ 270,000 270,000
-----------
Total Short-Term Investment
(Cost $270,000) .............................. 270,000
-----------
Total Investments
(Cost $30,235,820) (e) ....................... 92.0% 29,940,408(f)
Cash and Other Assets,
Less Liabilities ............................. 8.0 2,585,472
----------- -----------
Net Assets ..................................... 100.0% $32,525,880
=========== ===========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Portfolio of Investments (unaudited) continued
- ----------
(a) Issued with oil-linked certificates. Each certificate represents 1,250 oil-
linked payment obligations.
(b) Issued with Value Recovery Rights. For every $1.00 in face value of par
bonds, the holder receives $1.00 in notional Value Recovery Rights.
(c) Segregated as collateral for options and forward foreign currency
contracts.
(d) Floating rate. Rate shown is the rate in effect at June 30, 1997.
(e) The cost stated also represents the aggregate cost for Federal income tax
purposes.
(f) At June 30, 1997 net unrealized depreciation for securities was $295,412,
based on cost for Federal income tax purposes. This consisted of aggregate
gross unrealized appreciation for all investments on which there was an
excess of market value over cost of $436,306 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $731,718.
(g) The following abbreviations are used in the above portfolio:
AP - Argentinian Peso
A$ - Australian Dollar
C$ - Canadian Dollar
DK - Danish Krone
DM - Deutsche Mark
ECU - European Currency Unit
FF - French Franc
IP - Irish Punt
IL - Italian Lira
N$ - New Zealand Dollar
(Pound) - Pound Sterling
ZAR - South African Rand
SP - Spanish Peseta
SK - Swedish Krona
$ - U.S. Dollar
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
Statement of Assets and Liabilities as of June 30, 1997 (unaudited)
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $30,235,820) ............................................ $ 29,940,408
Cash denominated in foreign currencies (identified cost $1,893,145) .......................................... 1,894,145
Cash ......................................................................................................... 310,363
Receivables:
Investment securities sold ................................................................................. 861,630
Interest ................................................................................................... 803,943
Fund shares sold ........................................................................................... 46,304
Unrealized net appreciation on forward foreign currency contracts ............................................ 303,627
Unamortized organization expense ............................................................................. 21,965
------------
Total assets .............................................................................................. 34,182,385
------------
LIABILITIES:
Payables:
Investment securities purchased ............................................................................ 1,375,885
Fund shares redeemed ....................................................................................... 42,164
NYLIFE Distributors ........................................................................................ 22,587
Transfer agent ............................................................................................. 8,670
Adviser .................................................................................................... 6,663
Custodian .................................................................................................. 3,771
Trustees ................................................................................................... 232
Accrued expenses ............................................................................................. 51,814
Dividend payable ............................................................................................. 144,719
------------
Total liabilities ......................................................................................... 1,656,505
------------
Net assets ................................................................................................... $ 32,525,880
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized:
Class A .................................................................................................... $ 10,902
Class B .................................................................................................... 19,562
Additional paid-in capital ................................................................................... 31,413,587
Accumulated distribution in excess of net investment income .................................................. (123,445)
Accumulated undistributed net realized gain on investments ................................................... 601,588
Accumulated undistributed net realized gain on foreign currency transactions ................................. 618,303
Net unrealized depreciation on investments ................................................................... (295,412)
Net unrealized appreciation on translation of assets and liabilities in foreign currencies and forward
foreign currency contracts ................................................................................. 280,795
------------
Net assets ................................................................................................... $ 32,525,880
============
CLASS A
Net assets applicable to outstanding shares .................................................................. $ 11,615,064
============
Shares of beneficial interest outstanding .................................................................... 1,090,223
============
Net asset value per share outstanding ........................................................................ $ 10.65
Maximum sales charge (4.50% of offering price) ............................................................... 0.50
------------
Maximum offering price per share outstanding ................................................................. $ 11.15
============
CLASS B
Net assets applicable to outstanding shares .................................................................. $ 20,910,816
============
Shares of beneficial interest outstanding .................................................................... 1,956,171
============
Net asset value and offering price per share outstanding ..................................................... $ 10.69
============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE>
Statement of Operations for the six months ended June 30, 1997 (unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Interest ......................................................................................... $ 1,056,465
-----------
Expenses:
Advisory ......................................................................................... 70,380
Distribution--Class B ............................................................................ 64,387
Transfer agent ................................................................................... 40,566
Administration ................................................................................... 39,100
Service .......................................................................................... 39,100
Shareholder communication ........................................................................ 23,522
Registration ..................................................................................... 18,010
Professional ..................................................................................... 17,671
Custodian ........................................................................................ 14,819
Recordkeeping .................................................................................... 6,700
Amortization of organization expense ............................................................. 4,945
Trustees ......................................................................................... 409
Miscellaneous .................................................................................... 4,557
-----------
Total expenses before reimbursement ............................................................. 344,166
Fees waived by Administrator and Adviser ........................................................... (46,920)
-----------
Net expenses .................................................................................... 297,246
-----------
Net investment income .............................................................................. 759,219
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain from:
Security transactions ............................................................................ 581,327
Foreign currency transactions .................................................................... 618,303
-----------
Net realized gain on investments and foreign currency transactions ................................. 1,199,630
-----------
Net change in unrealized appreciation (depreciation) on investments:
Security transactions ............................................................................ (2,063,187)
Translation of assets and liabilities in foreign currencies and forward foreign currency contracts 143,563
-----------
Net unrealized loss on investments and foreign currencies .......................................... (1,919,624)
-----------
Net realized and unrealized loss on investments and foreign currency transactions .................. (719,994)
-----------
Net increase in net assets resulting from operations ............................................... $ 39,225
===========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six months
ended Year ended
June 30, December 31,
1997* 1996
============ ============
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income .......................................................................... $ 759,219 $ 1,378,963
Net realized gain on investments ............................................................... 581,327 467,595
Net realized gain on foreign currency transactions ............................................. 618,303 1,128,390
Net change in unrealized appreciation (depreciation) on investments ............................ (2,063,187) 358,520
Net change in unrealized appreciation on translation of assets and liabilities in foreign
currencies and forward foreign currency contracts ............................................. 143,563 160,131
------------ ------------
Net increase in net assets resulting from operations ........................................... 39,225 3,493,599
------------ ------------
Dividends and distributions to shareholders:
From net investment income:
Class A ....................................................................................... (333,858) (794,237)
Class B ....................................................................................... (512,127) (984,527)
From net realized gain on investments and foreign currency transactions:
Class A ....................................................................................... -- (162,643)
Class B ....................................................................................... -- (253,849)
------------ ------------
Total dividends and distributions to shareholders ........................................... (845,985) (2,195,256)
------------ ------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ....................................................................................... 1,000,360 2,149,516
Class B ....................................................................................... 5,226,370 7,816,122
Net asset value of shares issued to shareholders in reinvestment of dividends and distributions:
Class A ....................................................................................... 67,113 251,550
Class B ....................................................................................... 355,304 1,098,725
------------ ------------
6,649,147 11,315,913
Cost of shares redeemed:
Class A ....................................................................................... (1,109,605) (2,500,800)
Class B ....................................................................................... (3,192,036) (3,834,311)
------------ ------------
Increase in net assets derived from capital share transactions .............................. 2,347,506 4,980,802
------------ ------------
Net increase in net assets .................................................................. 1,540,746 6,279,145
NET ASSETS:
Beginning of period .............................................................................. 30,985,134 24,705,989
------------ ------------
End of period .................................................................................... $ 32,525,880 $ 30,985,134
============ ============
Accumulated distribution in excess of net investment income ...................................... $ (123,445) $ (36,679)
============ ============
</TABLE>
- ----------
* Unaudited.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class B
===============
Class A Class B Class A Class B Class A Class B September 13,**
======= ======== ======== ======== ========= ======== through
Six months ended Year ended Year ended December 31,
June 30, 1997* December 31, 1996 December 31, 1995 1994
===================== ===================== ===================== ==========
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $10.95 $10.98 $10.43 $10.45 $9.90 $9.90 $10.00
------- -------- -------- -------- --------- -------- --------
Net investment income ................. 0.28 0.21 0.72 0.64 1.15 1.06 0.12
Net realized and unrealized gain (loss)
on investments ...................... (0.56) (0.47) 0.27 0.27 0.59 0.61 (0.08)
Net realized and unrealized gain (loss)
on foreign currency transactions .... 0.29 0.24 0.41 0.42 0.07 0.07 (0.02)
------- -------- -------- -------- --------- -------- --------
Total from investment operations ...... 0.01 (0.02) 1.40 1.33 1.81 1.74 0.02
------- -------- -------- -------- --------- -------- --------
Less dividends and distributions:
From net investment income ............ (0.31) (0.27) (0.73) (0.65) (0.61) (0.56) (0.12)
From net realized gain on investments
and foreign currency transactions ... -- -- (0.15) (0.15) (0.28) (0.28) --
In excess of net realized gain on
investments and foreign currency
transactions ........................ -- -- -- -- (0.39) (0.35) --
------- -------- -------- -------- --------- -------- --------
Total dividends and distributions ..... (0.31) (0.27) (0.88) (0.80) (1.28) (1.19) (0.12)
------- -------- -------- -------- --------- -------- --------
Net asset value at end of period ...... $10.65 $10.69 $10.95 $10.98 $10.43 $10.45 $9.90
======= ======== ======== ======== ========= ======== ========
Total investment return (a) ........... 0.16% (0.14%) 13.90% 13.13% 18.68% 17.96% 0.20%
Ratios (to average net assets)/
Supplemental Data:
Net investment income .............. 5.27%+ 4.62%+ 5.4% 4.8% 5.6% 4.9% 4.8%+
Net expenses ....................... 1.49%+ 2.14%+ 1.5% 2.1% 1.5% 2.2% 2.8%+
Expenses (before waiver) ........... 1.79%+ 2.44%+ 1.8% 2.4% 1.8% 2.5% 3.1%+
Portfolio turnover rate ............... 100% 100% 59% 59% 103% 103% 4%
Net assets at end of period (in 000's) $11,615 $20,911 $11,965 $19,020 $11,494 $13,212 $17,155
</TABLE>
- ----------
* Unaudited.
** Commencement of Operations.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is not
annualized.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
<PAGE>
MainStay International Bond Fund
Note 1--Organization and Business:
The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business
Trust. The Trust is registered under the Investment Company Act of 1940, as
amended, (the "Act") as an open-end management investment company and is
comprised of fourteen funds. These financial statements and notes relate only to
MainStay International Bond Fund (the "Fund").
The Fund currently offers two classes of shares. Class A shares, whose
distribution commenced on January 3, 1995, are offered at net asset value per
share plus an initial sales charge. Class B shares are offered without an
initial sales charge, although a declining contingent deferred sales charge may
be imposed on redemptions made within six years of purchase. Class A shares and
Class B shares bear the same voting (except for issues that relate solely to one
class), dividend, liquidation and other rights and conditions except that the
Class B shares are subject to higher distribution fee rates. Each class of
shares bears distribution and/or service fee payments under a distribution plan
pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The Fund's investment objective is to seek competitive overall return
commensurate with an acceptable level of risk by investing primarily in a
portfolio of non-U.S. (primarily government) debt securities.
Note 2--Significant Accounting Policies:
The following is a summary of significant accounting policies followed by the
Fund:
Valuation of Fund Shares. The net asset value per share of each class of shares
is calculated on each day the New York Stock Exchange (the "Exchange") is open
for trading as of the close of regular trading on the Exchange. The net asset
value per share of each class of shares is determined by taking the assets
attributable to a class of shares, subtracting the liabilities attributable to
that class, and dividing the result by the outstanding shares of that class.
Securities Valuation. Portfolio securities of the Fund are stated at value
determined (a) by appraising debt securities at prices supplied by a pricing
agent selected by the Adviser, whose prices reflect broker/dealer supplied
valuations and electronic data processing techniques if those prices are deemed
by the Adviser to be representative of market values at the regular close of
business of the New York Stock Exchange, and (b) by appraising all other
securities and other assets, including debt securities for which prices are
supplied by a pricing agent but are not deemed by the Adviser to be
representative of market values, but excluding money market instruments with a
remaining maturity of sixty days or less and including restricted securities and
securities for which no market quotations are available, at fair value in
accordance with procedures approved by the Trustees. Short-term securities which
mature in more than 60 days are valued at current market quotations. Short-term
securities which mature in 60 days or less are valued at amortized cost if their
term to maturity at purchase was 60 days or less, or by amortizing the
difference between market value on the 61st day prior to maturity and value on
maturity date if their original term to maturity at purchase exceeded 60 days.
20
<PAGE>
Notes to Financial Statements (unaudited)
Events affecting the values of certain portfolio securities that occur between
the close of trading on the principal market for such securities (foreign
exchanges and over-the-counter markets) and the regular close of the New York
Stock Exchange will not be reflected in the Fund's calculation of net asset
value unless the Adviser believes that the particular event would materially
affect net asset value, in which case an adjustment would be made.
Forward Foreign Currency Contracts. A forward foreign currency contract is an
agreement to buy or sell currencies of different countries on a specified future
date at a specified rate. During the period the forward contract is open,
changes in the value of the contract are recognized as unrealized gains or
losses by "marking to market" such contract on a daily basis to reflect the
market value of the contract at the end of each day's trading. When the forward
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transaction and
the Fund's basis in the contract. The Fund enters into forward foreign currency
contracts in order to hedge its foreign currency denominated investments and
receivables and payables against adverse movements in future foreign exchange
rates.
The use of forward contracts involves, to varying degrees, elements of market
risk in excess of the amount recognized in the statement of assets and
liabilities. The contract amount reflects the extent of the Fund's involvement
in these financial instruments. Risks arise from the possible movements in the
foreign exchange rates underlying these instruments. The net unrealized
appreciation on forward contracts reflects the Fund's exposure at period end to
credit loss in the event of a counterparty's failure to perform its obligations.
Forward foreign currency contracts open at June 30, 1997:
<TABLE>
<CAPTION>
Value on Unrealized
Contract Trade Current Appreciation/
Amount Date Value (Depreciation)
====== ==== ===== ==============
Foreign Currency Sale Contracts
- -------------------------------
<S> <C> <C> <C> <C> <C>
Australian Dollar, expiring 9/3/97 ..... A$ 2,860,000 $2,177,947 $2,144,282 $33,665
Danish Krone, expiring 7/22/97 ......... DK 4,360,000 663,918 658,434 5,484
Deutsche Mark, expiring 7/3/97--10/20/97 DM 31,124,274 18,596,901 17,927,313 669,588
French Franc, expiring 8/18/97 ......... FF 4,910,000 844,405 839,119 5,286
Irish Punt, expiring 7/3/97--10/10/97 .. IP 755,000 1,156,630 1,137,964 18,666
Italian Lira, expiring 8/1/97 .......... IL 488,000,000 283,538 286,456 (2,918)
Japanese Yen, expiring 7/7/97 .......... (Yen) 192,524,500 1,675,000 1,684,397 (9,397)
New Zealand Dollar, expiring 7/23/97 ... N$ 1,370,000 941,738 927,939 13,799
Pound Sterling, expiring 7/7/97 ........ (Pound) 1,068,000 1,735,897 1,777,097 (41,200)
Spanish Peseta, expiring 8/1/97 ........ SP 52,500,000 358,021 357,105 916
Swedish Krona, expiring 8/1/97 ......... SK 15,665,000 2,042,684 2,028,555 14,129
Swiss Franc, expiring 7/10/97--9/29/97 . CF 3,350,190 2,338,287 2,310,564 27,723
-----------
735,741
-----------
</TABLE>
21
<PAGE>
MainStay International Bond Fund
<TABLE>
<CAPTION>
Value on Unrealized
Contract Trade Current Appreciation/
Amount Date Value (Depreciation)
====== ==== ===== ==============
Foreign Currency Buy Contracts
- ------------------------------
<S> <C> <C> <C> <C> <C>
Australian Dollar, expiring 7/7/97 ..... A$ 970,000 $ 755,630 $ 726,766 $ (28,864)
Canadian Dollar, expiring 7/16/97 ...... C$ 2,661,229 1,928,418 1,931,198 2,780
Deutsche Mark, expiring 7/3/97--10/10/97 DM 27,438,461 16,208,039 15,769,406 (438,633)
French Franc, expiring 8/18/97--8/20/97 FF 18,345,000 3,196,023 3,135,275 (60,748)
Irish Punt, expiring 7/3/97 ............ IP 185,000 280,218 279,093 (1,125)
Italian Lira, expiring 8/1/97 .......... IL 1,100,000,000 648,623 645,700 (2,923)
Japanese Yen, expiring 7/7/97 .......... (Yen) 196,524,000 1,590,000 1,719,388 129,388
Pound Sterling, expiring 9/17/97 ....... (Pound) 359,128 587,137 596,261 9,124
Spanish Peseta, expiring 7/16/97 ....... SP 36,800,000 254,144 250,277 (3,867)
Swedish Krona, expiring 8/1/97 ......... SK 7,450,000 970,557 964,745 (5,812)
Swiss Franc, expiring 7/10/97--9/29/97 . CF 3,342,924 2,330,967 2,299,533 (31,434)
-------------
(432,114)
-------------
Net Appreciation ....................... $ 303,627
=============
</TABLE>
Organization Costs. Costs incurred in connection with the Fund's initial
organization and registration totalled approximately $54,000 and are being
amortized over 60 months beginning at the commencement of operations.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes withheld at the source.
Dividends and Distributions to Shareholders. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
monthly. Income dividends and capital gain distributions are determined in
accordance with Federal income tax regulations which may differ from generally
accepted accounting principles.
Security Transactions and Investment Income. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Interest income is
accrued daily except when collection is not expected. Discounts on securities
purchased for the Fund are accreted on the constant yield method over the life
of the respective securities, or, if applicable, over the period to the first
call date.
22
<PAGE>
Notes to Financial Statements (unaudited) continued
Expenses. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when allocations of direct expenses can otherwise fairly be
made. The investment income and expenses (other than expenses incurred under the
Distribution Plan) and realized and unrealized gains and losses on investments
of the Fund are allocated to separate classes of shares based upon their
relative net asset value on the date the income is earned or expenses and
realized and unrealized gains and losses are incurred.
Foreign Currency Investing. The books and records of the Fund are recorded in
U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the
mean between the buying and selling rates last quoted by any major U.S. bank at
the following dates:
(i) market value of investment securities, other assets and liabilities--at the
valuation date,
(ii) purchases and sales of investment securities, income and expenses--at the
date of such transactions.
The assets and liabilities of the Fund are presented at the exchange rates and
market values at the close of the period. The changes in net assets arising from
fluctuations in exchange rates and the changes in net assets resulting from
changes in market prices are not separately presented. However, gains and losses
from certain foreign currency transactions are treated as ordinary income for
Federal income tax purposes.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on forward currency contracts, net currency gains or losses realized
as a result of differences between the amounts of securities sale proceeds or
purchase cost, dividends, interest and withholding taxes as recorded on the
Fund's books, and the U.S. dollar equivalent amount actually received or paid.
Net currency gains or losses from valuing such foreign currency denominated
assets and liabilities at period end exchange rates are reflected in unrealized
foreign exchange gains.
There are certain risks involved in investing in foreign securities that are in
addition to the usual risks inherent in domestic instruments. These risks
include those resulting from future adverse political and economic developments
and possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions.
23
<PAGE>
MainStay International Bond Fund
Foreign currency held at June 30, 1997:
<TABLE>
<CAPTION>
Currency Cost Value
====================================================== ========== ==========
<S> <C> <C> <C> <C>
Argentinian Peso AP 8,476 $ 8,477 $ 8,477
Australian Dollar A$ 16,153 12,136 12,102
Austrian Schilling AS 324 28 26
Belgian Franc BF 5,337,500 152,935 148,468
Canadian Dollar C$ 11,323 8,139 8,207
Danish Krone DK 171,948 26,639 25,932
Deutsche Mark DM 1,584,124 912,255 909,057
European Currency Unit ECU 32,250 36,440 36,362
French Franc FF 504,015 88,485 85,848
Irish Punt IP 10,876 17,162 16,409
Italian Lira IL 1,461,993 861 860
New Zealand Dollar N$ 28,712 19,677 19,461
Pound Sterling (Pound) 365,080 594,648 607,607
Spanish Peseta SP 29,133 200 198
Swedish Krona SK 117,000 15,063 15,131
---------- ----------
$1,893,145 $1,894,145
========== ==========
</TABLE>
Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
Note 3--Fees and Related Party Policies:
Investment Advisory and Administration Fees. MacKay-Shields Financial
Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an
Investment Advisory Agreement. MacKay-Shields is a registered investment adviser
and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New
York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect
wholly-owned subsidiary of New York Life, is the Administrator for the Fund.
The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an annual
rate of 0.25% and 0.15%, respectively, of the average daily net assets of the
Fund. The Adviser and Administrator each agreed that a portion of its fees,
$31,280 and $15,640, respectively, for the six months ended June 30, 1997, would
not be imposed, pursuant to the applicable contracts, until such time as the
Fund reaches $50 million in net assets. Had the net assets reached $50 million,
the Adviser and Administrator would have been paid 0.45% and 0.25%,
respectively.
24
<PAGE>
Notes to Financial Statements (unaudited) continued
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"). The
Fund, with respect to each class of shares, has adopted a Distribution Plan (the
"Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Class A Plan, the Distributor receives payments from the Fund at
an annual rate of 0.25% of the average daily net assets of the Fund's Class A
shares, which is an expense of the Class A shares of the Fund for distribution
or service activities as designated by the Distributor. Pursuant to the Class B
Plan, the Fund's Class B shares are subject to the payment of a monthly
distribution fee, which is an expense of the Class B shares of the Fund, at the
annual rate of 0.75% of the lesser of:
(a) the aggregate gross sales of the Fund's Class B shares since the inception
of the Fund (not including reinvestment of dividends or capital gains
distributions), less the aggregate net asset value of the Fund's Class B shares
exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or upon which such charge has been
waived; or (b) the average daily net assets of the Fund's Class B shares.
The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund. Service fee as shown on the statement of
operations represents the fees for both Class A shares and Class B shares.
The Plan provides that the distribution fee is payable to NYLIFE Distributors
regardless of the amounts actually expended by NYLIFE Distributors for
distribution of the Fund's shares and service activities.
NYLIFE Distributors anticipates that its actual distribution expenditures will
substantially exceed the distribution fee received by it during the initial
years of the operation of the Plan and that in later years its expenditures may
be less than the distribution fee.
Sales Charges. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $2,567 for the six
months ended June 30, 1997. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges on redemptions of Class B shares of
$14,907 for the six months ended June 30, 1997.
Trustees Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee
of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus
reimbursement for travel and out-of-pocket expenses. The Trust allocates this
expense in proportion to the net assets of the respective Funds.
Capital. At June 30, 1997, NYLIFE Distributors held shares of Class A of the
Fund with a net asset value of $7,989,251, which represents 68.8% of the net
assets of Class A shares at period end.
25
<PAGE>
MainStay International Bond Fund
Other. NYLIFE Distributors has received $2,858 for providing the Fund certain
transfer agency services for the period January 1, 1997, through April 30, 1997.
Effective May 1, 1997, MainStay Shareholder Services Inc. ("MSS"), an indirect
wholly owned subsidiary of New York Life Insurance Company, was appointed
Transfer, Dividend Disbursing and Shareholder Servicing Agent. MSS was paid $675
for services rendered May 1, 1997, through June 30, 1997.
Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $549 for the six months ended June
30, 1997.
Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the six months ended June 30, 1997, amounted to
$6,700.
Note 4--Purchases and Sales of Securities (in 000's):
During the six months ended June 30, 1997, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $33,810 and $26,222, respectively.
Note 5--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1997* December 31, 1996
------------------ -------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold ................................................ 94 488 196 725
Shares issued in reinvestment of dividends and distributions 6 34 23 101
---- ---- ---- ----
100 522 219 826
Shares redeemed ............................................ (103) (299) (228) (357)
---- ---- ---- ----
Net increase (decrease) .................................... (3) 223 (9) 469
==== ==== ==== ====
</TABLE>
- ----------
* Unaudited.
26
<PAGE>
This page intentionally left blank
27
<PAGE>
The MainStay Funds
<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund graph indicating of companies in expanding markets and are willing to accept a higher
risk/reward of with strong growth potential level of risk for higher return potential
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in a portfolio that tracks You seek a conservative way to partici-
Equity Index Fund graph indicating the makeup and returns of the pate in the growth potential of stocks+
risk/reward of S&P 500*
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Offers broad diversification into You prefer the higher return potential
International Equity Fund graph indicating international stock markets with of international equities or want to
risk/reward of an emphasis on risk control add diversification to your domestic
Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Fund [Horizontal bar Invests in convertible securities for You want income from securities that
As of 6/2/97, this Fund graph indicating a special blend of long-term growth may offer growth potential if converted
was closed to new investors. risk/reward of potential and dividend income into common stock
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Balances current income with growth You seek a combination of income and
Total Return Fund graph indicating opportunities by investing in stocks, growth potential and want to manage
risk/reward of bonds, and money market instruments risk through diversification
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks undervalued stocks with You seek to maximize total return from
Value Fund graph indicating attractive dividends and a stimulus securities which may have more poten-
risk/reward of for positive change tial than the market currently sees
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's.
+ The original investment is guaranteed provided it is held for 10 years with
all dividend and capital gain distributions reinvested. If shares are
redeemed prior to or after the one-day guarantee date, the investor loses
the benefit of the guarantee with respect to those shares.
++ Investments in foreign securities may be subject to greater risks than
domestic investments. These risks include currency fluctuations, changes in
U.S. or foreign tax or currency laws, and changes in monetary policies and
economic and political conditions in foreign countries.
(S) While individual securities owned by the Government Fund may be guaranteed
by the U.S. government and its agencies, the share price of the Fund is not
guaranteed and will fluctuate with market conditions.
|| Certain of the Fund's investments may be speculative.
# Investments in the Money Market Fund are neither insured nor guaranteed by
the U.S. government and there is no assurance that the Fund will be able to
maintain a stable net asset value of $1.00 per share; investment returns
will vary with market conditions.
** A small portion of the Fund's income may be subject to state and local
taxes and the Alternative Minimum Tax. Capital gains, if any, may also be
taxed.
28
<PAGE>
<TABLE>
<CAPTION>
INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Seeks a high level of current income You are seeking to combine high
Government Fund graph indicating consistent with safety of principal current income and safety of principal
risk/reward of primarily from U.S. government
Fund] securities(S)
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield [Horizontal bar An aggressive high-yield bond You want to maximize current income
Corporate Bond Fund graph indicating fund that is actively managed for and can accept the higher risk of
risk/reward of maximum current income|| securities with high yield potential
Fund]
- -----------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current yields and You prefer the higher return potential
INTERNATIONAL BOND FUND graph indicating competitive total return from non- of international bonds or want to
risk/reward of U.S. bonds with an emphasis on add diversification to your domestic
Fund] risk control investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating stability of principal, and liquidity, competitive yields on cash you're plan-
risk/reward of with free checkwriting# ning to spend or invest in the near future
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks current income and competi- You seek to combine the return potential
Strategic Income Fund graph indicating tive overall return by investing in of high-grade, high-yield,|| and inter-
risk/reward of a diversified portfolio of domestic national bonds and want to manage risk
Fund] and foreign debt securities++ through multimarket diversification
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Seeks high current income exempt You are a California resident and want to
California Tax Free Fund graph indicating from both federal and California keep more of what you earn by invest-
risk/reward of income taxes consistent with ing for income that's double tax free**
Fund] preservation of capital**
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are a New York State or City resident
New York Tax Free Fund graph indicating from federal, New York State, and and want to keep more of what you earn
risk/reward of New York City income taxes consis- with income that's double or triple tax
Fund] tent with preservation of capital** free**
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are in a high federal income tax
Tax Free Bond Fund graph indicating from regular federal income tax con- bracket or want to pay less of your
risk/reward of sistent with preservation of capital** investment income to the IRS
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A word about risk and reward
The "thermometers" in the tables above show how much risk the investor must
assume and the related return potential. Generally speaking, investments with
higher return potential also carry higher risks. So, the longer the indicator
bar, the higher the risk and reward potential of the Fund.
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send any money. Shares
must be offered in the investor's state of residence.
29
<PAGE>
- --------------------------------------------------------------------------------
MAINSTAY
International Bond Fund
- --------------------------------------------------------------------------------
[GRAPHIC]
Semiannual Report
June 30, 1997
Unaudited
[LOGO] MAINSTAY(R)
FUNDS
OFFICERS & TRUSTEES
Alice T. Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
[LOGO] MAINSTAY(R) FUNDS
NYLIFE Distributors Inc.
Morris Corporate Center, Building A
300 Interpace Parkway
Parsippany, New Jersey 07054
Administrator & Distributor of The MainStay Funds
http://www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly owned subsidiary of
New York Life Insurance Company.
[LOGO] NEW YORK LIFE
This report is provided for the information of shareholders of the MainStay
International Bond Fund. It may be given to others only when preceded or
accompanied by an effective MainStay Funds prospectus. This report does not
offer to sell any securities or solicit orders to buy them.
(C)1997. All rights reserved. MSSA10-08/97
[GRAPHIC]
<PAGE>
Table of Contents
Chairperson's Letter 2
MainStay International Equity Fund
Highlights 4
$10,000 Invested in the MainStay
International Equity Fund versus
Morgan Stanley Capital International
EAFE Index--Class A & Class B Shares 5
Portfolio Management Discussion and Analysis 6
Year-by-Year & Six-Month Performance 7
Diversification by Country--Top 5 8
Portfolio Composition 10
Returns & Lipper Rankings 11
Top 10 Equity Holdings 12
10 Largest Purchases 12
10 Largest Sales 12
Portfolio of Investments 13
Unaudited Financial Statements 20
Notes to Financial Statements 24
The MainStay Funds 32
<PAGE>
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[GRAPHIC]
Chairperson's Letter
After a remarkable six-year period of expansion, the U.S. economy continued to
grow throughout the first half of 1997. For most investors, the overall impact
was positive, but there were some rough seas along the way.
As the stock market made gains early in the year, concerns about the possibility
of impending inflation brought increased price volatility. In late March, the
Federal Reserve Board moved to raise interest rates in an effort to slow
economic growth. Although this preemptive strike helped keep inflation in check,
the initial reaction from both the stock and bond markets was negative. As a
result, bond prices faltered and stocks tumbled more than 9% from their peak
before both markets began to stabilize.
As employment figures, earnings estimates, and other indicators began to suggest
that economic growth was slowing in the second quarter, the stock market not
only recovered lost ground, but soared to record highs. With higher valuations,
however, the market became increasingly volatile, reacting severely to any news
that could signal a shift in buying patterns or interest rates.
Positive performance, emerging concerns
Despite the volatility, domestic stock and bond markets closed the first half of
1997 with positive returns. While Malaysia and Singapore had negative results,
most international markets performed well. Japan began to climb out of its
recession, and Hong Kong advanced as the market realized the investment
potential of Chinese unification.
In Europe, low interest rates and ongoing restructuring helped corporations
improve sales and earnings. Economic reforms drew countries closer to European
Monetary Union, and political victories in France and England focused attention
on the need to reduce unemployment and keep inflation under control. In
Australia and New Zealand, bond markets rallied as the central banks engineered
lower interest rates.
Given these results, many investors are once again celebrating their good
fortune. The underlying volatility, however, should serve to remind us that the
level of growth we've enjoyed for more than six years is not typical market
behavior.
Certainly no one can predict what will happen next, so it's important to keep
recent performance in perspective. We believe that having realistic
expectations, as well as a long-range plan and diversified investments can help
you work toward achieving your goals, wherever the markets may move.
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2
<PAGE>
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Solid team approach
At MainStay(R), we believe our risk-averse approach can help provide reassurance
to many investors, particularly in uncertain times. Each MainStay Fund is
managed by a team of experienced professionals who employ disciplined investment
strategies to seek competitive returns with careful attention to downside risk.
Our team approach offers investors a combination of experience, insight, and
market perspective that few individuals could provide on their own. It also
helps provide important checks and balances in security selection, market
evaluation, and overall accountability.
Our Fund managers believe that strong companies tend to get stronger in up
markets and perform better than average when the markets go down. Using
selection criteria appropriate to the individual Funds they manage, they may
look for specific catalysts that are likely to stimulate growth, enhance value,
or increase yield without taking on unnecessary risk.
Looking forward
As we move into the second half of 1997, we expect that an intensified focus on
inflation, interest rates, and corporate earnings will account for much of the
momentum driving the market. Regardless of how events unfold, you can be
confident that we will hold true to our disciplined management approach.
At MainStay, we believe that having a close relationship with your Registered
Representative is one of the best ways to keep your long-term focus in any
market environment. Therefore, we urge you to speak with your Registered
Representative regularly--whether the market happens to be up or down--so he or
she can understand your needs and help keep you on a steady course.
While we've seen positive results for the first half of the year, we remain
somewhat cautious. Whatever the future brings, we'll continue to provide the
information, service, and support you can consider when making decisions--and
the prudent management you depend on to pursue your long-range goals.
Sincerely,
/s/ Alice T. Kane
Alice T. Kane
July 1997
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3
<PAGE>
MainStay International Equity Fund Highlights
MARKET HIGHLIGHTS
FOR THE 6 MONTHS ENDED 6/30/97
- --------------------------------------------------------------------------------
o After a weak first quarter, many international markets showed outstanding
results in the second quarter of 1997, helping boost returns for the
six-month reporting period.
o Restructuring and economic improvements led to excellent local returns in
many European markets, although a strong dollar moderated performance for
U.S. investors.
o Economic recovery and favorable currency movements helped Japanese equities
regain some momentum, while property speculation in Malaysia presented
substantial investment risks.
o Concerns over Chinese rule slowed performance in Hong Kong during the first
quarter of 1997, but returns were strong for the first half of the year.
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FUND HIGHLIGHTS FOR THE
6- AND 12-MONTH PERIODS ENDED 6/30/97
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o One-year total returns of 14.51% and 13.63% for Class A and Class B shares,
respectively, excluding all sales charges, as of 6/30/97.
o The Fund reduced its positions in Germany, France, and Spain and increased
exposure in Switzerland and Belgium to strengthen core European holdings
and broaden diversification.
o Malaysian holdings were sold and invested primarily in Singapore, which the
Fund manager believes has a stable economy and strong fundamentals, despite
negative returns for the first half of the year.
o Over the reporting period, the Fund lagged its average Lipper* peer fund
and while Class A shares outperformed the Morgan Stanley Capital
International EAFE Index,+ Class B shares underperformed.
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- ----------
* See footnote + and table on page 11 for more information on Lipper
Analytical Services, Inc.
+ See footnote on page 5 for more information on the Morgan Stanley Capital
International EAFE Index.
4
<PAGE>
$10,000 Invested in the MainStay
International Equity Fund versus
Morgan Stanley Capital International
EAFE Index
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Morgan Stanley
International Capital International
Period-end Equity Fund EAFE Index*
- --------------------------------------------------------------------------------
<S> <C> <C>
9/13/94 $ 9,450.00 $10,000.00
12/94 $ 9,232.65 $ 9,586.00
12/95 $ 9,717.81 $10,661.00
12/96 $10,668.60 $11,306.00
6/97 $11,870.00 $12,572.00
</TABLE>
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Morgan Stanley
International Capital International
Period-end Equity Fund EAFE Index*
- -------------------------------------------------------------
<S> <C> <C>
9/13/94 $10,000.00 $10,000.00
12/94 $ 9,770.00 $ 9,586.00
12/95 $10,187.10 $10,661.00
12/96 $11,109.00 $11,306.00
6/97 $11,949.00 $12,572.00
</TABLE>
- ----------
The Class A graph assumes an initial investment of $10,000 made on 9/13/94
reflecting the effect of the 5.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,450 and includes the historical
performance of the Class B shares for periods from inception (9/13/94)
through 12/31/94. The Class B graph assumes an initial investment of
$10,000 made on 9/13/94. Returns reflect the Contingent Deferred Sales
Charge (CDSC) of 3.0%, as it would apply for the period shown. All results
include reinvestment of distributions at net asset value and the change in
share price for the stated period. Past performance is no guarantee of
future results.
* The Morgan Stanley Capital International Europe, Australia, Far East (Free)
Index--The EAFE Index--is an unmanaged, capitalization-weighted index
containing approximately 1,000 equity securities of companies located
outside the U.S.
[GRAPHIC]
5
<PAGE>
Portfolio Management Discussion and Analysis
In the first quarter of 1997, concerns about rising U.S. interest rates and a
decline in U.S. equities caused weakness in many international markets. During
the second quarter, however, investors returned to the fundamentals of their own
------------
markets. This move produced excellent returns in most countries and positive
overall results for international investors in the first half of the year.
Ongoing restructuring, low inflation, moderate growth, and progress toward
-------------
European Monetary Union improved overall performance in Europe. Several core
- -----------------------
European markets provided double-digit returns, with Spain up more than 36%,
Germany up 32% and France up 23% for the first half of 1997 in local currency
terms. As impressive as these returns may be, a strengthening dollar resulted in
more moderate returns for U.S. investors.
Asian markets were also generally strong. Japan began to climb out of its severe
recession and posted positive returns for the first half of the year. Hong Kong
suffered in the first quarter as investor concerns over rule by the People's
Republic of China caused a drop in equity values. Later, however, those fears
subsided and Hong Kong provided positive results for the first half of the year.
In contrast, Singapore and Malaysia both underperformed. Emerging markets had
variable results and just after the first half of 1997 ended, Thailand devalued
its currency.
How did the MainStay International Equity Fund do in this environment?
For the six months ended 6/30/97, the MainStay International Equity Fund had
total returns of 11.26% and 10.89% for Class A shares and Class B shares,
respectively, excluding all sales charges. These results lagged the average
Lipper* international fund which returned 12.53% for the same period. While
Class A shares outperformed the Morgan Stanley Capital International EAFE Index
(EAFE Index),+ which returned 11.21% for the first half of 1997, Class B shares
underperformed the Index.
What detracted from performance during the reporting period?
The Fund suffered due to an overweighted position in France, which was
------------
negatively affected uring, and shortly after, the country's elections. In
addition, because the Fund was underweighted in Japan, it did not benefit as
much from the strengthening of the yen as did funds with heavier weightings.
What decisions made the biggest contributions to the Fund's performance?
As international investors, we believe that country selection is the most
important decision that we can make. Given the previous weaknesses in Japan, we
felt the Fund could benefit by a strengthened position in core European
countries. During the first half of 1997, we reduced the
[GRAPHIC]
Fundamentals
- ------------
Key economic factors such as interest rates, gross national product, inflation,
unemployment, and currency stability, which may affect the direction of a
country's economy--or issuer-specific factors such as assets, earnings, sales,
products, and management, which may affect the performance of a company's
securities.
Restructuring
- -------------
Any action designed to improve the overall financial structure, labor relations,
or productivity of a company. Restructuring may include such steps as changing
management, investing in new plant and equipment, engaging in mergers and
acquisitions, or taking other action to increase output or lower costs.
- ----------
* See footnote and table on page 11 for more information on Lipper Analytical
Services, Inc.
+ See footnote on page 5 for more information on the Morgan Stanley Capital
International EAFE Index.
6
<PAGE>
YEAR-BY-YEAR & SIX-MONTH PERFORMANCE
[THE FOLLOWING WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period-end Total Return
%
- --------------------------------------
<S> <C>
12/94 -2.30 Class B
12/95 5.25 Class A
12/95 4.27 Class B
12/96 9.78 Class A
12/96 9.05 Class B
6/97 11.26 Class A
6/97 10.89 Class B
</TABLE>
- ----------
See footnote * on page 11 for more information on performance.
Fund's Japanese exposure and reduced the Fund's positions in Germany, France,
and Spain to add holdings in Switzerland and Belgium. This strategic shift
strengthened the Fund's diversification within Europe and had a positive impact
on the Fund's overall performance.
How much did you reduce the Fund's Japanese exposure?
Japan is still the largest international equity market and the Fund continues to
allocate more assets there than to any other country. At the end of 1996, Japan
represented about 29% of the Fund's investment portfolio. At the end of the
first half of 1997, it was about 26%. The Fund is currently underweighted in
Japan relative to the Morgan Stanley Capital International EAFE Index, which is
the benchmark against which we measure the Fund's performance.
The signs of recovery in Japan are positive, and while the market's 7.5% return
may look meager next to the 20% to 40% returns in some European markets, Japan
was still a positive contributor to performance. In addition, the Japanese yen
strengthened relative to the dollar, so currency movements had a positive impact
for U.S. investors.
Why did you select Belgium and Switzerland?
Diversification was an important consideration. Belgium's economy is tied to
other core European economies, which are generally getting stronger and
providing moderate growth. As a result, we believe the prospects there are very
positive. Switzerland has a number of companies that are export oriented and
benefited from low interest rates and favorable exchange rates. Novartis, a
Swiss pharmaceutical company that resulted from a merger between Ciba Geigy and
Sandoz, is an excellent example.
With the high returns in Germany, France, and Spain, was it wise to reduce the
Fund's holdings in these markets?
With local returns over 20% or 30%, we felt it was a good time to take some
prof-
[GRAPHIC]
European Monetary Union
- -----------------------
A proposed system that would allow participating European countries to operate
with a common currency or monetary unit.
Emerging markets
- ----------------
Countries with smaller or more recently established capital markets.
Weighting
- ---------
The proportion of a portfolio allocated to a specific market sector or country,
i.e., a fund is said to be overweighted in a country when that portion of the
portfolio is greater than the country's total equities relative to the
international equity markets as a whole.
7
<PAGE>
DIVERSIFICATION BY COUNTRY--TOP 5 AS OF 6/30/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Country Percentage
- --------------------------------
<S> <C>
Japan 25.6%
Germany 10.0%
France 9.1%
United Kingdom 7.4%
Australia 6.8%
All Other 41.1%
</TABLE>
- ----------
Actual percentages will vary over time.
its. We remain overweighted in many core European countries, including France,
Austria, and Italy. Decreasing the Fund's holdings in Spain brought the Fund
from an overweighted position to a relatively neutral position relative to the
EAFE Index. At the same time, the Fund's investments in Switzerland and Belgium
brought the Fund a more diversified exposure within Europe.
Which companies provided the best performance during the reporting period?
There were several. For example, in Germany, we had positive results from
Volkswagen. In the Netherlands, Philips Electronics did very well. And in
Italy, which has benefited from low interest rates, low exchange rates, and the
privatization of industry, we've had positive results from Telecom Italia Mobile
- -------------
and its sister companies in telecommunications and cellular equipment.
Have deregulation and privatization had an impact on telecommunications in other
countries?
Absolutely. As the industry moved from dependence on cables to fiber optics and
cellular technology, we've also seen a general shift from government-regulated
telephone monopolies to a more competitive private market. The move in that
direction is creating opportunities for businesses in Europe and the Far East,
just as it did in the United States. On the whole, we think this is a positive
trend and we have telecommunications holdings in several countries.
Which markets didn't do well during the reporting period?
By far the worst performer was Malaysia. We were concerned about the temporary
slowdown in technology, rising interest rates, and speculation on property
values.
[GRAPHIC]
Privatization
- -------------
The process of converting state-run or publicly operated companies into
privately owned and operated entities. In theory, enterprises may run more
efficiently and offer better service to customers when owned by shareholders
rather than the government.
8
<PAGE>
Although we had hoped that the situation could be contained, when property
speculation continued, we saw it as a signal to reduce the Fund's holdings. We
decided to sell Malaysian stocks in the second quarter, and since Malaysia
represented only about 3% of the Fund's investment portfolio at the beginning of
the year, the overall impact was minor.
Where did you invest the money that you raised selling Malaysian stocks?
In Singapore and in Europe. Although the market in Singapore showed some
weakness during the reporting period, we believe it has a stable economy, strong
fundamentals, and has been a solid performer over time. In Europe, corporate
restructuring and economic improvements continue to look attractive, especially
on a relative basis.
What happened in the United Kingdom during the first half of the year?
The Fund started off the year underweighted in the U.K. and continues to
maintain that position. Interest rates have been rising in Britain and we
believe that to restrain their economy, further rate increases may be necessary.
The British have come out with a new budget that isn't as favorable for
corporations as it might be, so we're not taking any action at this time.
What major risks did investors face during the reporting period?
As you know, investments in foreign securities may be subject to greater risks
than domestic investments. These risks include currency fluctuations, changes in
U.S. or foreign tax or currency laws, and changes in monetary policies and
economic and political conditions in foreign countries. During the period, many
investors were concerned about news reports of small Japanese banks facing
solvency problems. Seeking to avoid difficulties of this nature, the Fund was
invested primarily in large, well-established companies during the reporting
period. Managing risk is a major component in our approach to international
investing.
How did shifting currencies affect the Fund?
The U.S. dollar generally strengthened relative to European currencies. While
that substantially reduced returns in U.S. dollar terms, our currency hedging
----------------
strategy helped reduce the negative impact currency movements had on the Fund.
As I mentioned, the Japanese yen strengthened against the dollar, and while the
Fund's yen exposure was limited, it had a positive impact on the Fund's
performance.
Did the Fund invest in emerging markets?
No. During the reporting period, we did not believe that the reward potential in
emerging markets justified the level of risk investors would have to take. While
many investors are attracted by stellar returns in emerging markets, we prefer
core established markets. Thailand's recent currency devaluation is just one
example of the kind of risk investors may face in emerging markets.
[GRAPHIC]
Hedging/Currency management
- ---------------------------
An investment strategy that seeks to reduce the effects of currency fluctuations
on investor returns. There can be no assurance that currency hedging will be
beneficial to investors.
9
<PAGE>
What about markets in transition like Hong Kong?
Investors were a little cautious about Hong Kong in the first quarter, but as
the transition to unified rule by the People's Republic of China approached,
many investors began to realize the market's long-range potential. Hong Kong is
the fifth largest banking center and the seventh largest trading center in the
world. It's the gateway for Chinese exports and its fundamentals remain strong.
We held the Fund's investments in Hong Kong throughout the first half of the
year, and our holdings contributed positively to the Fund's performance.
What is your outlook for the Fund?
We continue to believe that restructuring and monetary union will benefit
European markets and we are strongly committed to the Fund's diversification
strategy in Europe. As new developments unfold, we may continue to shift assets
among European markets to take advantage of opportunities as they arise. We're
pleased with the economic developments in Japan as well, and if fundamentals
continue to improve, we may begin looking for selected opportunities to increase
the Fund's exposure there. In any event, we will continue to seek long-term
growth of capital commensurate with an acceptable level of risk.
Shigemi Takagi
Portfolio Manager
PORTFOLIO COMPOSITION AS OF 6/30/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percentage
- ---------------------------------------------------------
<S> <C>
Common Stocks 88.7%
Preferred Stock 0.1%
Cash, Equivalents, Other Assets
less Liabilities 11.2%
</TABLE>
- ----------
Actual percentages will vary over time.
[GRAPHIC]
Investments in foreign securities may be subject to greater risks than domestic
investments. These risks include currency fluctuations, changes in U.S. or
foreign tax or currency laws, and changes in monetary policies and economic and
political conditions in foreign countries.
10
<PAGE>
Returns & Lipper Rankings as of 6/30/97
<TABLE>
<CAPTION>
Fund average annual total returns*
- --------------------------------------------------------------------------------
1 year Life of Fund through 6/30/97
<S> <C> <C>
Class A 14.51% 8.48%
Class B 13.63% 7.73%
- --------------------------------------------------------------------------------
<CAPTION>
Fund SEC returns*
- --------------------------------------------------------------------------------
1 year Life of Fund through 6/30/97
<S> <C> <C>
Class A 8.21% 6.31%
Class B 8.63% 6.79%
- --------------------------------------------------------------------------------
<CAPTION>
Fund Lipper+ rankings & Lipper category returns as of 6/30/97
- --------------------------------------------------------------------------------
1 year Life of Fund through 6/30/97
<S> <C> <C>
Class A 228 out of n/a
368 funds
Class B 245 out of 160 out of
368 funds 221 funds
Average Lipper
international fund 16.54% 9.88%
- --------------------------------------------------------------------------------
<CAPTION>
Fund per share net asset values & distributions for the six months ended 6/30/97
- --------------------------------------------------------------------------------
NAV 6/30/97 Income Capital Gains
<S> <C> <C> <C>
Class A $11.66 $0.0000 $0.0000
Class B $11.51 $0.0000 $0.0000
- --------------------------------------------------------------------------------
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested.
Class A shares, first offered to the public on 1/3/95, are sold with a
maximum initial sales charge of 5.5% and an annual 12b-1 fee of .25%.
Performance figures for this class include the historical performance of
the Class B shares for periods from inception (9/13/94) up to 12/31/94.
Performance data for the two classes after this date vary based on
differences in their expense structures. Class B shares of the Fund are
sold with no initial sales charge, but are subject to a maximum CDSC of up
to 5% if shares are redeemed during the first 6 years of purchase and an
annual 12b-1 fee of up to 1%.
+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales
charges. Lipper averages listed above are not class specific. Life of Fund
return is from the period of the Class B shares' initial offering through
6/30/97. The Fund's Class A shares were first offered to the public on
1/3/95; Class B shares on 9/13/94.
[GRAPHIC]
11
<PAGE>
Top 10 Equity Holdings as of 6/30/97
<TABLE>
<CAPTION>
HOLDING COUNTRY AMOUNT
- --------------------------------------------------------------------------------
<S> <C> <C>
Novartis S.A. Registered Switzerland $1,600,989
Toyota Motor Corp. Japan 1,506,429
Siemens AG Germany 1,384,602
Ente Nazionale Idrocarburi S.p.A Italy 1,131,900
National Australia Bank, Ltd. Australia 1,065,462
Allianz AG Registered Germany 1,047,326
Broken Hill Proprietary Co., Ltd. Australia 1,024,756
Norsk Hydro ASA Norway 970,139
Deutsche Telekom AG Germany 936,395
Hitachi Corp., Ltd. Japan 928,431
- --------------------------------------------------------------------------------
10 Largest Purchases for the six months ended 6/30/97
<CAPTION>
SECURITY COUNTRY AMOUNT OF PURCHASE
- --------------------------------------------------------------------------------
<S> <C> <C>
Novartis S.A. Registered Switzerland $1,293,978
Nestle S.A. Registered Switzerland 841,897
Roche Holdings AG Genusscheine Switzerland 830,576
Telecom Corp. of New Zealand Ltd. New Zealand 726,436
Daimler-Benz AG Germany 464,790
National Australia Bank, Ltd. Australia 400,380
Credit Suisse Group Registered Switzerland 395,561
UBS--Union Bank of Switzerland Switzerland 394,524
Carter Holt Harvey Ltd. New Zealand 346,422
Schweizerische Bankverein Registered Switzerland 338,624
- --------------------------------------------------------------------------------
10 Largest Sales for the six months ended 6/30/97
<CAPTION>
SECURITY COUNTRY AMOUNT OF SALE
- --------------------------------------------------------------------------------
<S> <C> <C>
Singapore Telecommunications, Ltd. Singapore $ 665,400
Telefonica de Espana, S.A Spain 613,882
Ente Nazionale Idrocarburi S.p.A Italy 493,377
Empresa Nacional de Electricidad, S.A Spain 473,144
Repsol, S.A Spain 395,054
Iberdrola, S.A Spain 348,216
Banco de Bilbao Vizcaya, S.A. Registered Spain 306,864
Videsh Sanchar Nigam, Ltd. United States 297,087
Telecom Italia S.p.A Italy 295,008
Oversea--Chinese Banking Corp., Ltd.
Foreign Registered Singapore 292,236
- --------------------------------------------------------------------------------
</TABLE>
[GRAPHIC]
- ----------
This breakdown is provided for informational purposes only. The Fund's holdings
may change daily. All purchases and sales are aggregated by issuer. A
shareholder owns shares of the Fund but does not own a direct interest in any of
the specific securities listed. Short-term securities are excluded. See
Portfolio of Investments for specific type of security held.
12
<PAGE>
Portfolio of Investments June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
Shares Value
=========================
COMMON STOCKS (88.7%)+
<S> <C> <C>
AUSTRALIA (6.8%)
Amcor, Ltd.(forest products & paper) ......... 60,500 $ 398,845
Boral, Ltd.
(building materials & components) .......... 84,200 263,035
Brambles Industries, Ltd.
(business & public services) ............... 10,700 209,943
Broken Hill Proprietary Co., Ltd.
(energy sources) ........................... 70,210 1,024,756
Coles Myer, Ltd. (merchandising) ............. 35,468 183,072
CSR, Ltd. (multi-industry) ................... 94,400 362,790
Foster's Brewing Group, Ltd.
(beverages & tobacco) ...................... 153,380 282,664
Mount Isa Mines Holdings, Ltd.
(metals-nonferrous) ........................ 105,400 154,761
National Australia Bank, Ltd.
(banking) .................................. 74,973 1,065,462
News Corp., Ltd.
(broadcasting & publishing) ................ 79,412 377,768
Pacific Dunlop, Ltd.
(multi-industry) ........................... 25,800 75,766
Rio Tinto, Ltd. (metals-nonferrous) .......... 22,468 380,062
Santos, Ltd. (energy sources) ................ 37,500 156,478
Westpac Banking Corp., Ltd.
(banking) .................................. 71,100 424,516
WMC, Ltd. (metals-nonferrous) ................ 48,900 305,887
----------
5,665,805
----------
AUSTRIA (2.6%)
Austrian Airlines Oesterreichische
Luftverkehrs AG
(transportation-airlines) (a) .............. 450 72,669
Bank Austria AG (banking) .................... 5,750 318,896
Creditanstalt-Bankverein Stamm AG
(banking) .................................. 3,050 178,109
EA-Generali AG (insurance) ................... 950 249,876
Flughafen Wien AG
(transportation-airlines) .................. 2,200 92,945
Oesterreichische Brau-
Beteiligungs AG
(beverages & tobacco) ...................... 1,950 115,304
OMV AG (energy sources) ...................... 2,850 365,145
Verbundgesellschaft-
Oesterreichische
Elektrizitatswirtschafts AG Class A
(utilities-electrical & gas) ............... 3,550 250,085
Voest-Alpine Technologie AG
(machinery & engineering) .................. 1,500 274,558
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
<TABLE>
<CAPTION>
Shares Value
=========================
<S> <C> <C>
AUSTRIA (Continued)
Wienerberger Baustoffindustrie AG
(building materials & components) .......... 1,320 $ 271,190
----------
2,188,777
----------
BELGIUM (1.7%)
Electrabel, S.A.
(utilities-electrical & gas) ............... 1,010 216,606
Fortis AG (insurance) ........................ 1,360 281,075
Generale de Banque, S.A. (banking) ........... 440 169,511
Kredietbank N.V. (banking) ................... 430 173,433
PetroFina, S.A. (energy sources) ............. 650 246,345
Reunies Electrobel & Tractebel, S.A
(multi-industry) ........................... 470 196,103
Solvay, S.A. Class A (chemicals) ............. 300 176,910
----------
1,459,983
----------
FRANCE (9.1%)
Alcatel Alsthom, S.A.
(electrical & electronics) ................. 2,567 321,808
AXA-UAP, S.A. (insurance) .................... 5,228 325,474
Carrefour, S.A. (merchandising) .............. 905 657,910
Compagnie de Saint Gobain, S.A
(miscellaneous-materials &
commodities) ............................... 2,103 306,983
Compagnie de Suez, S.A. (banking) ............ 111,240 273,793
Compagnie Financiere de Paribas,
S.A. Class A (banking) ..................... 2,916 201,654
Compagnie Generale des Eaux, S.A.
(business & public services) ............... 3,597 461,349
Elf Aquitaine, S.A. (energy sources) ......... 4,873 526,235
Eridania Beghin-Say, S.A.
(food & household products) ................ 1,030 154,388
Groupe Danone, S.A.
(food & household products) ................ 1,833 303,163
Havas, S.A.
(business & public services) ............... 2,799 201,906
Lafarge, S.A.
(building materials & components) .......... 2,250 140,076
L'Air Liquide, S.A. (chemicals) .............. 3,321 527,770
L'Oreal, S.A.
(health & personal care) ................... 1,947 821,127
LVMH (Moet Hennessy Louis Vuitton),
S.A. (beverages & tobacco) ................. 1,820 489,804
Michelin (CGDE), S.A. Class B
(tire & rubber) ............................ 2,769 166,444
Pernod-Ricard, S.A.
(beverages & tobacco) ...................... 980 50,578
Pinault-Printemps-Redoute, S.A.
(building materials & components) .......... 570 274,178
PSA Peugeot, S.A. (automobiles) .............. 520 50,309
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
MainStay International Equity Fund
<TABLE>
<CAPTION>
Shares Value
=========================
COMMON STOCKS (Continued)
<S> <C> <C>
FRANCE (Continued)
Rhone-Poulenc, S.A. Class A
(chemicals) ................................ 3,813 $ 155,873
Schneider, S.A.
(machinery & engineering) .................. 2,987 159,146
Societe Generale, S.A.
(banking) .................................. 2,970 331,859
Suez Lyonnaise des Eaux, S.A.
(multi-industry) ........................... 980 98,819
Thomson CSF, S.A.
(aerospace & military technology) .......... 4,791 123,551
Total, S.A. Class B (energy sources) ......... 4,474 452,664
----------
7,576,861
----------
GERMANY (10.0%)
Allianz AG Registered (insurance) ............ 5,000 1,047,326
BASF AG (chemicals) .......................... 17,550 649,111
Bayer AG (chemicals) ......................... 18,500 711,533
Daimler-Benz AG (automobiles) ................ 7,600 617,147
Deutsche Bank AG (banking) ................... 4,950 289,466
Deutsche Telekom AG
(telecommunications) ....................... 38,850 936,395
Dresdner Bank AG (banking) ................... 20,450 707,668
Karstadt AG (merchandising) .................. 50 17,819
Linde AG
(machinery & engineering) .................. 300 229,838
Mannesmann AG
(machinery & engineering) .................. 550 245,246
Muenchener Rueckversicherungs-
Gesellschaft AG Registered
(insurance) ................................ 104 291,851
Preussag AG (multi-industry) ................. 50 14,648
RWE AG (utilities-electrical & gas) .......... 6,400 275,461
Siemens AG (electrical & electronics) ........ 23,300 1,384,602
Thyssen AG (metals-steel) .................... 150 35,552
VEBA AG (utilities-electrical & gas) ......... 4,500 253,080
Viag AG (multi-industry) ..................... 750 341,313
Volkswagen AG (automobiles) .................. 400 306,909
----------
8,354,965
----------
HONG KONG (3.8%)
Cheung Kong (Holdings), Ltd.
(real estate) .............................. 55,000 543,096
China Light & Power Co., Ltd.
(utilities-electrical & gas) ............... 51,000 288,993
Hang Seng Bank, Ltd. (banking) ............... 32,800 467,830
Hong Kong Telecommunications, Ltd.
(telecommunications) ....................... 222,000 530,123
Hutchison Whampoa, Ltd.
(multi-industry) ........................... 63,000 544,838
</TABLE>
<TABLE>
<CAPTION>
Shares Value
=========================
HONG KONG (Continued)
<S> <C> <C>
Sun Hung Kai Properties, Ltd.
(real estate) ............................. 42,000 $ 505,534
Swire Pacific, Ltd. Class A
(multi-industry) ........................... 32,500 292,604
----------
3,173,018
----------
ITALY (5.7%)
Assicurazioni Generali S.p.A.
(insurance) ................................ 23,515 427,249
Banca Commerciale Italiana S.p.A.
(banking) .................................. 75,000 155,232
Benetton Group S.p.A.
(textile & apparel) ........................ 9,880 157,726
Credito Italiano S.p.A. (banking) ............ 66,000 120,693
Edison S.p.A. (energy sources) ............... 16,000 79,545
Ente Nazionale Idrocarburi S.p.A.
(energy sources) ........................... 200,000 1,131,900
Fiat S.p.A. (automobiles) .................... 88,000 316,673
Fiat S.p.A. di Risp (automobiles) ............ 26,000 48,845
Istituto Bancario San Paolo
di Torino S.p.A. (banking) ................. 26,500 193,061
Istituto Nazionale delle
Assicurazioni S.p.A. (insurance) ........... 105,000 159,907
Italgas S.p.A.
(utilities-electrical & gas) ............... 19,000 61,446
Mediobanca S.p.A.
(financial services) ....................... 19,500 118,329
Montedison S.p.A. (multi-industry) (a) ....... 153,080 100,992
Olivetti Group S.p.A. (data
processing & reproduction) (a) ............. 70,000 19,818
Parmalat Finanziaria S.p.A.
(food & household products) ................ 94,000 132,929
Pirelli S.p.A. (industrial components) ....... 68,000 168,333
Riunione Adriatica di Sicurta S.p.A.
(insurance) ................................ 14,325 113,291
Sirti S.p.A. (telecommunications) ............ 11,500 66,301
Telecom Italia S.p.A.
(telecommunications) ....................... 165,000 493,832
Telecom Italia S.p.A. di Risp
(telecommunications) ....................... 43,000 85,081
Telecom Italia Mobile S.p.A.
(telecommunications) ....................... 165,000 533,610
Telecom Italia Mobile S.p.A. di Risp
(telecommunications) ....................... 41,000 73,288
----------
4,758,081
----------
JAPAN (25.6%)
Ajinomoto Co., Inc.
(food & household products) (c) ............ 10,000 107,490
Asahi Bank, Ltd. (banking) (c) ............... 30,000 255,616
Asahi Chemical Industry Co., Ltd.
(chemicals) (c) ............................ 51,000 305,297
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Portfolio of Investments (unaudited) continued
<TABLE>
<CAPTION>
Shares Value
=========================
COMMON STOCKS (Continued)
<S> <C> <C>
JAPAN (Continued)
Asahi Glass Co., Ltd. (miscellaneous-
materials & components) (c) ................ 27,000 $ 268,986
Bank of Tokyo-Mitsubishi, Ltd.
(banking) (c) .............................. 1,000 20,100
Bridgestone Corp.
(industrial components) (c) ................ 7,000 162,720
Canon, Inc. (recreation &
other consumer goods) (c) .................. 23,000 627,111
Chiba Bank, Ltd. (banking) (c) ............... 4,000 23,840
Dai Nippon Printing Co., Ltd.
(business & public services) (c) ........... 14,000 316,876
Daiei, Inc. (merchandising) (c) .............. 14,000 89,924
Daiwa House Industry Co., Ltd.
(construction & housing) (c) ............... 10,000 122,346
Denso Corp.
(industrial components) (c) ................ 3,000 71,835
Fanuc, Ltd. (electronic
components & instruments) (c) .............. 4,000 153,806
Fuji Bank, Ltd. (banking) (c) ................ 36,000 541,119
Fuji Photo Film, Ltd. (recreation &
other consumer goods) (c) .................. 4,000 161,147
Fujitsu, Ltd. (data processing &
reproduction) (c) .......................... 27,000 375,165
Furukawa Electric Co.
(industrial components) (c) ................ 33,000 210,234
Hankyu Corp.
(transportation-road & rail) (c) ........... 16,000 88,509
Hitachi Corp., Ltd.
(electrical & electronics) (c) ............. 83,000 928,431
Honda Motor Co., Ltd.
(automobiles) (c) .......................... 9,000 271,346
Industrial Bank of Japan, Ltd.
(banking) (c) .............................. 31,000 482,218
Itochu Corp. (wholesale &
international trade) (c) ................... 62,000 334,302
Japan Airlines Co.
(transportation-airlines) (a)(c) ........... 24,000 109,272
Japan Energy Corp.
(energy sources) (c) ....................... 52,000 136,328
Joyo Bank (banking) (c) ...................... 8,000 44,254
Kajima Corp.
(construction & housing) (c) ............... 9,000 52,775
Kansai Electric Power Co., Inc.
(utilities-electrical & gas) (c) ........... 7,000 135,192
Kao Corp.
(food & household products) (c) ............ 32,000 444,640
Kawasaki Steel Corp.
(metals-steel) (c) ......................... 6,000 19,558
Kinki Nippon Railway Co., Ltd.
(transportation-road & rail) (c) ........... 23,000 140,698
</TABLE>
<TABLE>
<CAPTION>
Shares Value
=========================
<S> <C> <C>
JAPAN (Continued)
Kirin Brewery Co., Ltd.
(beverages & tobacco) (c) .................. 30,000 $ 311,982
Komatsu, Ltd.
(machinery & engineering) (c) .............. 27,000 219,436
Kubota Corp.
(machinery & engineering) (c) .............. 60,000 294,155
Marubeni Corp. (wholesale &
international trade) (c) .................. 58,000 263,568
Marui Co., Ltd. (merchandising) (c) .......... 10,000 186,141
Matsushita Electric Industrial Co.,
Ltd. (appliances & household
durables) (c) .............................. 15,000 302,806
Mitsubishi Chemical Corp.
(chemicals) (c) ............................ 34,000 111,125
Mitsubishi Corp. (multi-industry) (c) ........ 24,000 299,923
Mitsubishi Electric Corp.
(electrical & electronics) (c) ............. 56,000 313,695
Mitsubishi Estate Co., Ltd.
(construction & housing) (c) ............... 9,000 130,561
Mitsubishi Heavy Industries, Ltd.
(machinery & engineering) (c) .............. 113,000 868,019
Mitsubishi Trust & Banking Corp.
(financial services) ....................... 18,000 284,717
Mitsui Engineering & Shipbuilding Co.,
Ltd. (machinery & engineering) (a) ......... 44,000 96,129
Mitsui Fudosan Co., Ltd.
(construction & housing) ................... 17,000 234,730
Mitsui Marine & Fire Insurance Co.,
Ltd. (insurance) ........................... 11,000 79,595
Mitsui Trust & Banking Co., Ltd. .............
(financial services) ....................... 7,000 52,915
Mitsukoshi, Ltd. (merchandising) ............. 4,000 28,489
NEC Corp. (electrical & electronics) ......... 23,000 321,595
Nippon Express Co., Ltd.
(transportation-road & rail) ............... 9,000 71,966
Nippon Paper Industries Co.
(forest products & paper) .................. 13,000 75,321
Nippon Steel Corp. (metals-steel) ............ 145,000 463,779
Nippon Yusen Kabushiki Kaisha
(transportation-shipping) .................. 5,000 19,444
Nissan Motor Co., Ltd. (automobiles) ......... 54,000 419,524
NKK Corp. (metals-steel) ..................... 96,000 206,380
Nomura Securities Co., Ltd.
(financial services) ....................... 16,000 220,922
Obayashi Corp.
(construction & housing) ................... 16,000 107,245
Oji Paper Co., Ltd.
(forest products & paper) .................. 11,000 68,155
Osaka Gas Co., Ltd.
(utilities-electrical & gas) ............... 6,000 17,251
Sakura Bank, Ltd. (banking) .................. 41,000 314,587
Sankyo Co., Ltd.
(health & personal care) ..................... 4,000 134,581
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
MainStay International Equity Fund
<TABLE>
<CAPTION>
Shares Value
=========================
COMMON STOCKS (Continued)
<S> <C> <C>
JAPAN (Continued)
Sanyo Electric Co., Ltd.
(appliances & household durables) .......... 19,000 $ 85,345
Sekisui Chemical Co., Ltd.
(building materials & components) .......... 2,000 20,274
Sekisui House, Ltd.
(construction & housing) ................... 2,000 20,274
Sharp Corp.
(appliances & household durables) .......... 14,000 193,307
Shimizu Corp.
(construction & housing) ................... 9,000 54,033
Shiseido Co., Ltd.
(health & personal care) ................... 2,000 33,033
Shizuoka Bank, Ltd. (banking) ................ 1,000 11,448
Sony Corp.
(appliances & household durables) .......... 6,000 523,816
Sumitomo Bank, Ltd. (banking) ................ 41,000 673,602
Sumitomo Chemical Co. (chemicals) ............ 6,000 27,213
Sumitomo Corp.
(wholesale & international trade) .......... 8,000 76,204
Sumitomo Electric Industries
(industrial components) .................... 17,000 285,241
Sumitomo Marine & Fire
Insurance Co. (insurance) .................. 19,000 156,079
Sumitomo Metal Mining Co.
(metals-nonferrous) ........................ 14,000 99,100
Taisei Corp.
(construction & housing) ................... 47,000 218,099
Taisho Pharmaceutical Co.
(health & personal care) ................... 1,000 27,004
Takeda Chemical Industries, Ltd.
(health & personal care) ................... 19,000 534,652
Teijin, Ltd. (chemicals) ..................... 126,000 594,602
Tobu Railway Co., Ltd.
(transportation-road & rail) ............... 44,000 203,409
Tohoku Electric Power
(utilities-electrical & gas) ............... 2,000 35,655
Tokai Bank (banking) ......................... 24,000 247,488
Tokio Marine & Fire Insurance Co.
(insurance) ................................ 23,000 301,496
Tokyo Dome Corp. (leisure & tourism) ......... 7,000 94,206
Tokyo Electric Power Co., Inc.
(utilities-electrical & gas) ............... 28,000 589,708
Tokyo Gas Co., Ltd.
(utilities-electrical & gas) ............... 37,000 102,823
Tokyu Corp.
(transportation-road & rail) ............... 10,000 62,134
Toppan Printing Co., Ltd.
(business & public services) ............... 39,000 613,478
Tostem Corp.
(building materials & components) .......... 3,000 83,108
</TABLE>
<TABLE>
<CAPTION>
Shares Value
=========================
<S> <C> <C>
JAPAN (Continued)
Toto, Ltd.
(building materials & components) .......... 1,000 $ 12,322
Toyoda Automatic Loom Works, Ltd.
(machinery & engineering) .................. 1,000 22,721
Toyota Motor Corp. (automobiles) ............. 51,000 1,506,429
Yamaichi Securities Co., Ltd.
(financial services) ....................... 36,000 107,280
Yamanouchi Pharmaceutical Co., Ltd.
(health & personal care) ................... 5,000 134,581
Yamazaki Baking Co., Ltd.
(food & household products) ................ 1,000 17,653
Yasuda Trust & Banking
(financial services) ....................... 42,000 160,763
----------
21,448,451
----------
MALAYSIA (0.1%)
Telekom Malaysia Berhad
(telecommunications) ....................... 14,000 65,452
----------
NETHERLANDS (2.0%)
Elsevier N.V.
(broadcasting & publishing) ................ 6,200 103,791
ING Groep N.V. (insurance) ................... 5,307 245,128
Koninklijke PTT Nederland N.V.
(forest products & paper) .................. 3,465 136,172
Philips Electronics N.V.
(appliances & household durables) .......... 2,500 179,399
Royal Dutch Petroleum Co.
(energy sources) ........................... 13,600 708,695
Unilever CVA N.V.
(food & household products) ................ 1,200 253,067
Wolters Kluwer CVA N.V.
(broadcasting & publishing) ................ 503 61,356
----------
1,687,608
----------
NEW ZEALAND (1.9%)
Brierley Investments Ltd.
(multi-industry) ........................... 237,000 231,295
Carter Holt Harvey Ltd.
(forest products & paper) .................. 144,600 373,378
Fletcher Challenge Building
(building materials & components) .......... 30,200 90,671
Fletcher Challenge Energy
(energy sources) ........................... 30,500 91,985
Fletcher Challenge Forest
(forest products & paper) .................. 4,964 7,200
Fletcher Challenge Paper
(forest products & paper) .................. 63,400 153,396
Telecom Corp. of New Zealand Ltd.
(telecommunications) ....................... 136,200 692,300
----------
1,640,225
----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE>
Portfolio of Investments (unaudited) continued
<TABLE>
<CAPTION>
Shares Value
=========================
COMMON STOCKS (Continued)
<S> <C> <C>
NORWAY (2.1%)
Bergesen d.y. ASA Class A
(transportation-shipping) .................. 7,500 $ 177,747
Bergesen d.y. ASA Class B
(transportation-shipping) .................. 1,400 33,084
Dyno Industrier ASA (chemicals) .............. 1,200 30,980
Hafslund ASA Class A
(energy sources) ........................... 2,700 16,228
Hafslund ASA Class B
(energy sources) ........................... 1,700 9,242
Kvaerner ASA Class B
(machinery & engineering) .................. 1,100 61,605
Norsk Hydro ASA (energy sources) ............. 17,800 970,139
Norske Skogindustrier ASA Class A
(forest products & paper) .................. 3,400 117,965
Nycomed ASA Class A
(health & personal care) ................... 2,700 39,832
Nycomed ASA Class B
(health & personal care) ................... 1,700 24,267
Orkla ASA Class A (multi-industry) ........... 3,800 280,297
----------
1,761,386
----------
SINGAPORE (1.2%)
City Developments, Ltd. (real estate) 10,000 97,912
DBS Land, Ltd. (real estate) ................. 12,000 37,934
Development Bank of Singapore, Ltd.
Foreign Registered (banking) ............... 8,000 100,710
Fraser & Neave, Ltd.
(beverages & tobacco) ...................... 4,200 29,961
Keppel Corp., Ltd.
(machinery & engineering) .................. 11,250 49,727
Oversea-Chinese Banking Corp., Ltd.
Foreign Registered (banking) ............... 10,800 111,788
Singapore Airlines, Ltd.
Foreign Registered
(transportation-airlines) .................. 15,000 134,280
Singapore Press Holdings, Ltd.
Foreign Registered
(broadcasting & publishing) ................ 3,000 60,426
Singapore Telecommunications, Ltd.
(telecommunications) ....................... 141,000 260,335
United Overseas Bank, Ltd.
Foreign Registered (banking) ............... 10,000 102,808
----------
985,881
----------
SPAIN (2.3%)
Acerinox, S.A. (metals-steel) ................ 286 53,688
Autopistas Concesionares Espanola,
S.A. (business & public services) .......... 8,340 113,407
</TABLE>
<TABLE>
<CAPTION>
Shares Value
=========================
<S> <C> <C>
SPAIN (Continued)
Banco de Bilbao Vizcaya, S.A.
Registered (banking) ....................... 2,720 $ 221,365
Banco de Central Hispanoamericano,
S.A. (banking) ............................. 1,810 66,330
Banco de Santander, S.A. (banking) ........... 5,880 181,501
Corporacion Bancaria de Espana,
S.A. (banking) ............................. 1,430 80,211
Corporacion Mapfre, S.A. (insurance) ......... 590 31,449
Empresa Nacional de Electricidad,
S.A. (utilities-electrical & gas) .......... 2,930 246,424
Fomento de Construcciones y
Contratas, S.A.
(construction & housing) ................... 1,140 145,639
Gas Natural SDG, S.A.
(utilities-electrical & gas) ............... 890 194,785
Iberdrola, S.A.
(utilities-electrical & gas) ............... 9,740 123,173
Repsol, S.A. (energy sources) ................ 3,800 160,960
Telefonica de Espana, S.A.
(telecommunications) ....................... 11,480 332,504
----------
1,951,436
----------
SWITZERLAND (6.4%)
Credit Suisse Group Registered
(banking) .................................. 3,200 411,565
Nestle S.A. Registered
(food & household products) ................ 700 924,787
Novartis S.A. Registered
(health & personal care) ................... 1,000 1,600,989
Roche Holdings AG Genusscheine
(health & personal care) ................... 100 905,786
Schweizerische Bankverein
Registered (banking) (a) ................... 1,500 401,791
Schweizerische Rueckversicherungs
Gesellschaft Registered (insurance) ........ 200 283,294
UBS-Union Bank of Switzerland
(banking) .................................. 400 458,209
Zurich Versicherungs Gesellschaft
Registered (insurance) ....................... 1,000 398,532
----------
5,384,953
----------
UNITED KINGDOM (7.4%)
Abbey National PLC (banking) ................. 12,970 177,005
Barclays PLC (banking) ....................... 18,467 366,357
Bass PLC (beverages & tobacco) ............... 2,350 28,668
B.A.T. Industries PLC
(beverages & tobacco) ...................... 20,823 186,275
BG PLC (energy sources) ...................... 35,310 129,874
BOC Group PLC (chemicals) .................... 1,850 32,175
Boots Co. PLC (merchandising) ................ 2,603 30,477
British Airways PLC
(transportation-airlines) .................. 2,032 23,149
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE>
MainStay International Equity Fund
<TABLE>
<CAPTION>
Shares Value
=========================
COMMON STOCKS (Continued)
<S> <C> <C>
UNITED KINGDOM (Continued)
British Petroleum Co. PLC
(energy sources) ........................... 44,047 $ 547,240
British Telecommunications PLC
(telecommunications) ....................... 37,780 280,433
BTR PLC (multi-industry) ..................... 44,550 152,367
Cable & Wireless PLC
(telecommunications) ....................... 14,447 132,844
Centrica PLC (energy sources) ................ 35,310 43,046
Commercial Union PLC (insurance) ............. 2,046 21,504
EMI Group PLC (recreation & other
consumer goods) ............................ 1,640 29,410
Energy Group PLC (energy sources) ............ 6,283 67,028
General Electric Co. PLC
(electrical & electronics) ................. 27,656 165,240
GKN PLC (machinery & engineering) ............ 1,109 19,094
Glaxo Wellcome PLC
(health & personal care) ................... 25,948 535,497
Granada Group PLC
(leisure & tourism) ........................ 6,370 83,753
Grand Metropolitan PLC
(multi-industry) ........................... 22,212 214,966
Great Universal Stores PLC
(The) (merchandising) ...................... 12,940 130,939
Guinness PLC (beverages & tobacco) ........... 20,050 196,211
Hanson PLC (multi-industry) .................. 7,854 39,018
HSBC Holdings PLC
(financial services) ....................... 4,993 153,608
Imperial Chemical Industries PLC
(chemicals) ................................ 1,150 15,991
Imperial Tobacco Group PLC
(beverages & tobacco) ...................... 6,283 40,415
Kingfisher PLC (merchandising) ............... 1,597 18,127
Lloyds TSB Group PLC (banking) ............... 41,236 422,755
Marks & Spencer PLC
(merchandising) ............................ 39,026 323,456
MEPC PLC (real estate) ....................... 980 8,041
National Power PLC
(utilities-electrical & gas) ............... 11,860 103,035
Peninsular & Oriental Steam
Navigation Co. Deferred Stock
(The) (transportation-shipping) ............ 8,611 85,988
Prudential Corp. PLC (insurance) ............. 18,880 182,719
Rank Group PLC (leisure & tourism) ........... 9,710 61,490
Redland PLC (building
materials & components) .................... 1,915 10,852
Reed International PLC
(broadcasting & publishing) ................ 31,300 303,179
Reuters Holdings PLC
(broadcasting & publishing) ................ 10,840 114,200
Rio Tinto PLC Registered
(metals-nonferrous) ........................ 9,140 159,191
</TABLE>
<TABLE>
<CAPTION>
Shares Value
=========================
<S> <C> <C>
UNITED KINGDOM (Continued)
RMC Group PLC
(building materials & components) .......... 990 $ 16,073
Sainsbury (J.) PLC (merchandising) ........... 12,315 74,707
Scottish Power PLC
(utilities-electrical & gas) ............... 23,010 149,736
Thorn PLC
(appliances & household durables) .......... 1,640 4,695
Unilever PLC
(food & household products) ................ 8,730 250,123
Vodafone Group PLC (multi-industry) .......... 5,287 25,737
----------
6,156,688
----------
Total Common Stocks
(Cost $67,480,114) ......................... 74,259,570
----------
PREFERRED STOCK (0.1%)
AUSTRIA (0.1%)
Creditanstalt-Bankverein Vorzug AG
(banking) .................................. 1,550 62,323
----------
Total Preferred Stock
(Cost $90,929) ............................. 62,323
----------
WARRANTS (0.0%)(b)
FRANCE (0.0%)(b)
Compagnie Generale des Eaux, S.A.
Call Warrants
Strike price FF 900
Expire 5/2/01
(business & public services) (a) ........... 3,597 2,157
----------
Total Warrants ............................... 2,157
----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
<PAGE>
Portfolio of Investments (unaudited) continued
<TABLE>
<CAPTION>
Principal
Amount Value
============================
OPTIONS (0.2%)
<S> <C> <C>
UNITED STATES (0.2%)
U.S. Dollar Call/Deutsche Mark Put
Strike price DM 1.695
Expire 8/25/97 .......................... $ 5,265,000 $ 152,575
Strike price DM 1.745
Expire 9/15/97 .......................... 1,395,000 19,018
----------
Total Options
(Cost $95,657) .......................... 171,593
----------
SHORT-TERM INVESTMENT (4.6%)
COMMERCIAL PAPER (4.6%)
UNITED STATES (4.6%)
Merrill Lynch & Co. Inc.
6.22%, due 7/1/97 ....................... 3,900,000 3,900,000
----------
Total Short-Term Investment
(Cost $3,900,000) ....................... 3,900,000
----------
Total Investments
(Cost $71,566,700)(d) ................... 93.6% 78,395,643(e)
Cash and Other Assets,
Less Liabilities ........................ 6.4 5,328,540
------------ -----------
Net Assets ................................ 100.0% $83,724,183
============ ===========
</TABLE>
- ----------
(a) Non-income producing securities.
(b) Less than one tenth of a percent.
(c) Segregated as collateral for options and forward foreign currency
contracts.
(d) The cost for Federal income tax purposes is $71,645,222.
(e) At June 30, 1997 net unrealized appreciation for securities was $6,750,421,
based on cost for Federal income tax purposes. This consisted of aggregate
gross unrealized appreciation for all investments on which there was an
excess of market value over cost of $11,160,704 and aggregate gross
unrealized depreciation for all investments on which there was an excess of
cost over market value of $4,410,283.
(f) The following abbreviations are used in the above portfolio:
DM -Deutsche Mark
FF -French Franc
The table below sets forth the diversification of International Equity Fund
investments by industry.
<TABLE>
<CAPTION>
Value Percent+
=========================
INDUSTRY DIVERSIFICATION
<S> <C> <C>
Aerospace & Military Technology ............... $ 123,551 0.1%
Appliances & Household Durables ............... 1,289,367 1.5
Automobiles ................................... 3,537,183 4.2
Banking ....................................... 10,850,173 13.0
Beverages & Tobacco ........................... 1,731,863 2.1
Broadcasting & Publishing ..................... 1,020,721 1.2
Building Materials & Components ............... 1,181,780 1.4
Business & Public Services .................... 1,919,116 2.3
Chemicals ..................................... 3,338,579 4.0
Construction & Housing ........................ 1,085,702 1.3
Data Processing & Reproduction ................ 394,984 0.5
Electrical & Electronics ...................... 3,435,372 4.1
Electronic Components
& Instruments ............................... 153,806 0.2
Energy Sources ................................ 6,863,833 8.2
Financial Services ............................ 4,998,533 6.0
Food & Household Products ..................... 2,588,239 3.1
Forest Products & Paper ....................... 1,330,433 1.6
Health & Personal Care ........................ 4,791,348 5.7
Industrial Components ......................... 898,362 1.1
Insurance ..................................... 4,595,843 5.5
Leisure & Tourism ............................. 239,449 0.3
Machinery & Engineering ....................... 2,539,675 3.0
Merchandising ................................. 1,741,062 2.1
Metals-Nonferrous ............................. 1,099,001 1.3
Metals-Steel .................................. 778,956 0.9
Miscellaneous-Materials
& Commodities ............................... 306,983 0.4
Miscellaneous-Materials
& Components ................................ 268,986 0.3
Multi-Industry ................................ 3,271,477 3.9
Real Estate ................................... 1,192,517 1.4
Recreation & Other Consumer Goods ............. 817,668 1.0
Telecommunications ............................ 4,482,498 5.3
Textile & Apparel ............................. 157,726 0.2
Tire & Rubber ................................. 166,444 0.2
Transportation-Airlines ....................... 432,315 0.5
Transportation-Road & Rail .................... 566,715 0.7
Transportation-Shipping ....................... 316,263 0.4
Utilities-Electrical & Gas .................... 3,043,453 3.6
Wholesale & International Trade ............... 674,074 0.8
----------- -----
78,224,050 93.4
Cash and Other Assets,
Less Liabilities ............................ 5,500,133 6.6
----------- -----
Net Assets .................................... $83,724,183 100.0%
=========== =====
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
<PAGE>
Statement of Assets and Liabilities as of June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investment in securities, at value
(identified cost $71,566,700) .............................. $ 78,395,643
Cash denominated in foreign currencies
(identified cost $5,268,531) ............................... 5,301,810
Cash ......................................................... 651,114
Receivables:
Investment securities sold ................................. 6,187,264
Dividends and interest ..................................... 352,565
Fund shares sold ........................................... 203,463
Unrealized net appreciation on forward
foreign currency contracts ................................. 541,072
Unamortized organization expense ............................. 17,643
------------
Total assets .............................................. 91,650,574
------------
LIABILITIES:
Payables:
Investment securities purchased ............................ 7,647,747
NYLIFE Distributors ........................................ 78,993
Adviser .................................................... 40,175
Fund shares redeemed ....................................... 40,040
Transfer agent ............................................. 31,415
Custodian .................................................. 13,053
Trustees ................................................... 502
Accrued expenses ............................................. 74,466
------------
Total liabilities ......................................... 7,926,391
------------
Net assets ................................................... $ 83,724,183
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding
(par value of $.01 per share) unlimited number
of shares authorized:
Class A .................................................... $ 15,877
Class B .................................................... 56,647
Additional paid-in capital ................................... 73,027,203
Accumulated distribution in excess of net
investment income .......................................... (1,225,875)
Accumulated undistributed net realized
gain on investments ........................................ 132,660
Accumulated undistributed net realized gain
on foreign currency transactions ........................... 4,306,623
Net unrealized appreciation on investments ................... 6,828,943
Net unrealized appreciation on translation of
assets and liabilities in foreign currencies
and forward foreign currency contracts ..................... 582,105
------------
Net assets ................................................... $ 83,724,183
============
CLASS A
Net assets applicable to outstanding shares .................. $ 18,514,837
============
Shares of beneficial interest outstanding .................... 1,587,656
============
Net asset value per share outstanding ........................ $ 11.66
Maximum sales charge (5.50% of offering price) ............... 0.68
------------
Maximum offering price per share outstanding ................. $ 12.34
============
CLASS B
Net assets applicable to outstanding shares .................. $ 65,209,346
============
Shares of beneficial interest outstanding .................... 5,664,662
============
Net asset value and offering price per share outstanding ..... $ 11.51
============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
<PAGE>
Statement of Operations for the six months ended June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Income:
Dividends (a) ............................................... $ 852,369
Interest .................................................... 107,506
-----------
Total income ............................................... 959,875
-----------
Expenses:
Advisory .................................................... 219,186
Distribution--Class B ....................................... 191,700
Administration .............................................. 146,124
Transfer agent .............................................. 131,946
Service ..................................................... 91,327
Shareholder communication ................................... 35,760
Custodian ................................................... 29,841
Registration ................................................ 23,282
Professional ................................................ 17,822
Recordkeeping ............................................... 13,921
Amortization of organization expense ........................ 3,973
Trustees .................................................... 948
Miscellaneous ............................................... 11,368
-----------
Total expenses ............................................. 917,198
-----------
Net investment income ......................................... 42,677
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain from:
Security transactions ....................................... 594,847
Foreign currency transactions ............................... 4,306,623
-----------
Net realized gain on investments and foreign
currency transactions ....................................... 4,901,470
-----------
Net change in unrealized appreciation on investments:
Security transactions ....................................... 5,314,753
Translation of assets and liabilities in foreign
currencies and forward foreign currency contracts ........ (2,060,116)
-----------
Net unrealized gain on investments and foreign currencies ..... 3,254,637
-----------
Net realized and unrealized gain on investments and
foreign currency transactions ............................... 8,156,107
-----------
Net increase in net assets resulting from operations .......... $ 8,198,784
===========
</TABLE>
- ----------
(a) Dividends recorded net of foreign withholding taxes of $121,291.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six months
ended Year ended
June 30, December 31,
1997* 1996
============ ============
INCREASE IN NET ASSETS:
<S> <C> <C>
Operations:
Net investment income (loss) .................................... $ 42,677 $ (361,140)
Net realized gain (loss) on investments ......................... 594,847 (130,336)
Net realized gain on foreign currency transactions .............. 4,306,623 2,153,275
Net change in unrealized appreciation on investments ............ 5,314,753 656,008
Net change in unrealized appreciation on translation
of assets and liabilities in foreign currencies and
forward foreign currency contracts ............................. (2,060,116) 2,501,469
------------ ------------
Net increase in net assets resulting from operations ............ 8,198,784 4,819,276
------------ ------------
Dividends and distributions to shareholders:
From net realized gain on foreign
currency transactions:
Class A ........................................................ -- (844,610)
Class B ........................................................ -- (2,225,095)
In excess of net realized gain on investments:
Class A ........................................................ -- (45,418)
Class B ........................................................ -- (135,451)
------------ ------------
Total dividends and distributions to shareholders ............ -- (3,250,574)
------------ ------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ........................................................ 5,283,326 6,802,966
Class B ........................................................ 16,943,398 33,209,658
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions:
Class A ........................................................ -- 465,182
Class B ........................................................ -- 2,239,545
------------ ------------
22,226,724 42,717,351
Cost of shares redeemed:
Class A ........................................................ (6,119,510) (3,191,297)
Class B ........................................................ (10,766,185) (9,106,589)
------------ ------------
Increase in net assets derived from capital share transactions 5,341,029 30,419,465
------------ ------------
Net increase in net assets ................................... 13,539,813 31,988,167
NET ASSETS:
Beginning of period ............................................... 70,184,370 38,196,203
------------ ------------
End of period ..................................................... $ 83,724,183 $ 70,184,370
============ ============
Accumulated distribution in excess of net investment income ....... $ (1,225,875) $ (1,268,552)
============ ============
</TABLE>
- ----------
* Unaudited.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
22
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class B
===============
Class A Class B Class A Class B Class A Class B September 13,**
========== ========== ========== ========== ========== ========== through
Six months ended Year ended Year ended December 31,
June 30, 1997* December 31, 1996 December 31, 1995 1994
======================== ========================= ======================= ===============
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ......... $ 10.48 $ 10.38 $ 10.05 $ 9.97 $ 9.77 $ 9.77 $ 10.00
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net investment income
(loss) ...................... 0.02 (0.01) 0.29 0.24 0.27 0.26 (0.04)
Net realized and
unrealized gain (loss)
on investments .............. 0.84 0.83 0.07 0.07 0.10 0.07 (0.16)
Net realized and
unrealized gain (loss)
on foreign currency
transactions ................ 0.32 0.31 0.62 0.59 0.14 0.09 (0.03)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations .................. 1.18 1.13 0.98 0.90 0.51 0.42 (0.23)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Less dividends and
distributions:
From net realized gain on
foreign currency
transactions ................ -- -- (0.52) (0.46) (0.15) (0.15) --
In excess of net realized
gain on investments ......... -- -- (0.03) (0.03) (0.08) (0.07) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total dividends and
distributions ............... -- -- (0.55) (0.49) (0.23) (0.22) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net asset value at end
of period ................... $ 11.66 $ 11.51 $ 10.48 $ 10.38 $ 10.05 $ 9.97 $ 9.77
========== ========== ========== ========== ========== ========== ==========
Total investment return (a) ... 11.26% 10.89% 9.78% 9.05% 5.25% 4.27% (2.30%)
Ratios (to average net assets)/
Supplemental Data:
Net investment
income (loss) ........... 0.64%+ (0.04%)+ (0.1%) (0.8%) (0.2%) (1.0%) (1.6%)+
Expenses ................. 1.99%+ 2.67%+ 2.0% 2.7% 2.2% 3.0% 3.9%+
Portfolio turnover rate ....... 14% 14% 19% 19% 25% 25% 9%
Average commission
rate paid ................... $ 0.0337 $ 0.0337 $ 0.0374 $ 0.0374 (b) (b) (b)
Net assets at end of
period (in 000's) ........... $ 18,515 $ 65,209 $ 17,475 $ 52,709 $ 12,856 $ 25,341 $ 20,549
</TABLE>
- ----------
* Unaudited.
** Commencement of Operations.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is not
annualized.
(b) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
23
<PAGE>
MainStay International Equity Fund
Note 1--Organization and Business:
The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business
Trust. The Trust is registered under the Investment Company Act of 1940, as
amended, (the "Act") as an open-end management investment company and is
comprised of fourteen funds. These financial statements and notes relate only to
MainStay International Equity Fund (the "Fund").
The Fund currently offers two classes of shares. Class A shares, whose
distribution commenced on January 3, 1995, are offered at net asset value per
share plus an initial sales charge. Class B shares are offered without an
initial sales charge, although a declining contingent deferred sales charge may
be imposed on redemptions made within six years of purchase. Class A shares and
Class B shares bear the same voting (except for issues that relate solely to one
class), dividend, liquidation and other rights and conditions except that the
Class B shares are subject to higher distribution fee rates. Each class of
shares bears distribution and/or service fee payments under a distribution plan
pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The Fund's investment objective is to seek long-term growth of capital
commensurate with an acceptable level of risk by investing in a portfolio
consisting primarily of non-U.S. equity securities.
Note 2--Significant Accounting Policies:
The following is a summary of significant accounting policies followed by the
Fund:
Valuation of Fund Shares. The net asset value per share of each class of shares
is calculated on each day the New York Stock Exchange (the "Exchange") is open
for trading as of the close of regular trading on the Exchange. The net asset
value per share of each class of shares is determined by taking the assets
attributable to a class of shares, subtracting the liabilities attributable to
that class, and dividing the result by the outstanding shares of that class.
Securities Valuation. Portfolio securities of the Fund are stated at value
determined (a) by appraising common and preferred stocks which are traded on the
New York Stock Exchange at the last sale price on that day or, if no sale
occurs, at the mean between the closing bid and asked prices, (b) by appraising
common and preferred stocks traded on other United States national securities
exchanges or foreign securities exchanges as nearly as possible in the manner
described in (a) by reference to their principal exchange, including the
National Association of Securities Dealers National Market System, (c) by
appraising over-the-counter securities quoted on the National Association of
Securities Dealers NASDAQ system (but not listed on the National Market System)
at the bid price supplied through such system, (d) by appraising
over-the-counter securities not quoted on the NASDAQ system at prices supplied
by the pricing agent or brokers selected by the Adviser, if these prices are
deemed to be representative of market values at the regular close of business of
the New York Stock Exchange. Short-term securities which mature in more than 60
days are valued at current market quotations. Short-term securities which mature
in 60 days or less are valued at amortized cost if
24
<PAGE>
Notes to Financial Statements (unaudited)
their term to maturity at purchase was 60 days or less, or by amortizing the
difference between market value on the 61st day prior to maturity and value on
maturity date if their original term to maturity at purchase exceeded 60 days.
Events affecting the values of certain portfolio securities that occur between
the close of trading on the principal market for such securities (foreign
exchanges and over-the-counter markets) and the regular close of the New York
Stock Exchange will not be reflected in the Fund's calculation of net asset
value unless the Adviser believes that the particular event would materially
affect net asset value, in which case an adjustment would be made.
Forward Foreign Currency Contracts. A forward foreign currency contract is an
agreement to buy or sell currencies of different countries on a specified future
date at a specified rate. During the period the forward contract is open,
changes in the value of the contract are recognized as unrealized gains or
losses by "marking to market" such contract on a daily basis to reflect the
market value of the contract at the end of each day's trading. When the forward
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transaction and
the Fund's basis in the contract. The Fund enters into forward foreign currency
contracts in order to hedge its foreign currency denominated investments and
receivables and payables against adverse movements in future foreign exchange
rates.
The use of forward contracts involves, to varying degrees, elements of market
risk in excess of the amount recognized in the statement of assets and
liabilities. The contract amount reflects the extent of the Fund's involvement
in these financial instruments. Risks arise from the possible movements in the
foreign exchange rates underlying these instruments. The net unrealized
appreciation on forward contracts reflects the Fund's exposure at period end to
credit loss in the event of a counterparty's failure to perform its obligations.
Forward foreign currency contracts open at June 30, 1997:
<TABLE>
<CAPTION>
Value on Unrealized
Contract Trade Current Appreciation/
Amount Date Value (Depreciation)
============= ============= ============= =============
Foreign Currency Sale Contracts
- -------------------------------
<S> <C> <C> <C> <C> <C>
Australian Dollar, expiring 7/7/97--9/3/97 ........ A$ 4,135,000 $ 3,160,344 $ 3,099,539 $ 60,805
Deutsche Mark, expiring 7/7/97--10/20/97 .......... DM 41,415,221 24,686,072 23,837,899 848,173
French Franc, expiring 8/18/97 .................... FF 23,745,000 4,086,066 4,058,020 28,046
Italian Lira, expiring 8/1/97 ..................... IL 6,205,000,000 3,605,860 3,642,335 (36,475)
Japanese Yen, expiring 7/7/97--10/28/97 ........... (Yen) 1,642,188,955 14,079,096 14,454,921 (375,825)
New Zealand Dollar, expiring 7/23/97 .............. N$ 2,305,000 1,584,457 1,561,241 23,216
Norwegian Krone, expiring 7/21/97 ................. NK 8,655,000 1,221,652 1,183,173 38,479
Spanish Peseta, expiring 8/1/97 ................... SP 301,000,000 2,052,651 2,047,402 5,249
Swiss Franc, expiring 9/29/97--10/10/97 ........... CF 9,493,000 6,652,670 6,589,870 62,800
-------------
654,468
-------------
</TABLE>
25
<PAGE>
MainStay International Equity Fund
<TABLE>
<CAPTION>
Value on Unrealized
Contract Trade Current Appreciation/
Amount Date Value (Depreciation)
============= ============= ============= =============
Foreign Currency Buy Contracts
- ------------------------------
<S> <C> <C> <C> <C> <C>
Canadian Dollar, expiring 7/16/97 ............. C$ 5,458,435 $ 3,954,805 $ 3,961,071 $ 6,266
Deutsche Mark, expiring 7/7/97--9/29/97 ....... DM 33,869,529 19,782,055 19,483,843 (298,212)
French Franc, expiring 8/18/97 ................ FF 21,650,000 3,800,646 3,699,985 (100,661)
Italian Lira, expiring 8/1/97 ................. IL 2,450,000,000 1,431,041 1,438,150 7,109
Japanese Yen, expiring 7/7/97 ................. (Yen) 1,091,333,915 9,210,000 9,548,080 338,080
Pound Sterling, expiring 7/7/97 ............... (Pound) 2,470,000 4,042,028 4,109,954 67,926
Swiss Franc, expiring 7/10/97--9/29/97 ........ CF 9,465,000 6,643,297 6,509,393 (133,904)
-------------
(113,396)
-------------
Net Appreciation .............................. $ 541,072
=============
</TABLE>
Organization Costs. Costs incurred in connection with the Fund's initial
organization and registration totalled approximately $49,000 and are being
amortized over 60 months beginning at the commencement of operations.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes withheld at the source.
Dividends and Distributions to Shareholders. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
quarterly. Income dividends and capital gain distributions are determined in
accordance with Federal income tax regulations which may differ from generally
accepted accounting principles.
Security Transactions and Investment Income. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued daily.
Discounts on securities purchased for the Fund are accreted on the constant
yield method over the life of the respective securities.
Expenses. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when allocations of direct expenses can otherwise fairly be
made. The investment income and expenses (other than expenses incurred under the
Distribution Plan) and realized and unrealized gains and losses on investments
of the Fund are allocated to separate classes of shares based upon their
relative net asset value on the date the income is earned or expenses and
realized and unrealized gains and losses are incurred.
26
<PAGE>
Notes to Financial Statements (unaudited) continued
Foreign Currency Investing. The books and records of the Fund are recorded in
U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the
mean between the buying and selling rates last quoted by any major U.S. bank at
the following dates:
(i) market value of investment securities, other assets and liabilities--at the
valuation date,
(ii) purchases and sales of investment securities, income and expenses--at the
date of such transactions.
The assets and liabilities of the Fund are presented at the exchange rates and
market values at the close of the period. The changes in net assets arising from
fluctuations in exchange rates and the changes in net assets resulting from
changes in market prices are not separately presented. However, gains and losses
from certain foreign currency transactions are treated as ordinary income for
Federal income tax purposes.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on forward currency contracts, net currency gains or losses realized
as a result of differences between the amounts of securities sale proceeds or
purchase cost, dividends, interest and withholding taxes as recorded on the
Fund's books, and the U.S. dollar equivalent amount actually received or paid.
Net currency gains or losses from valuing such foreign currency denominated
assets and liabilities at period-end exchange rates are reflected in unrealized
foreign exchange gains.
There are certain risks involved in investing in foreign securities that are in
addition to the usual risks inherent in domestic instruments. These risks
include those resulting from future adverse political and economic developments
and possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions.
27
<PAGE>
MainStay International Equity Fund
Foreign currency held at June 30, 1997:
<TABLE>
<CAPTION>
Currency Cost Value
================================================== =========== ===========
<S> <C> <C> <C> <C>
Australian Dollar A$ 93,162 $ 72,021 $ 68,942
Austrian Schilling AS 328,016 27,226 26,753
Belgian Franc BF 11,383 363 317
Danish Krone DK 2,516 426 379
Deutsche Mark DM 1,064,900 617,109 602,750
French Franc FF 383,244 66,168 65,278
Hong Kong Dollar HK 461,452 59,606 59,563
Italian Lira IL 121,065,710 72,094 71,187
Japanese Yen (Yen) 1,451,176 12,186 12,682
Malaysian Ringgit MK 68,389 27,322 28,511
Netherland Guilder NG 43,325 22,723 22,112
New Zealand Dollar N$ 48,329 33,496 32,757
Norwegian Krone NK 187,922 26,702 25,670
Pound Sterling (Pound) 935,109 1,481,109 1,556,310
Singapore Dollar S$ 291,010 201,891 203,532
Spanish Peseta SP 368,699,369 2,529,577 2,506,787
Swiss Franc CF 26,650 18,512 18,280
----------- -----------
$ 5,268,531 $ 5,301,810
=========== ===========
</TABLE>
Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
Note 3--Fees and Related Party Policies:
Investment Advisory and Administration Fees. MacKay-Shields Financial
Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an
Investment Advisory Agreement. MacKay-Shields is a registered investment adviser
and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New
York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect
wholly-owned subsidiary of New York Life, is the Administrator for the Fund.
The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an annual
rate of 0.60% and 0.40%, respectively, of the average daily net assets of the
Fund.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"). The
Fund, with respect to each class of shares, has adopted a Distribution Plan (the
"Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act.
28
<PAGE>
Notes to Financial Statements (unaudited) continued
Pursuant to the Class A Plan, the Distributor receives payments from the Fund at
an annual rate of 0.25% of the average daily net assets of the Fund's Class A
shares, which is an expense of the Class A shares of the Fund for distribution
or service activities as designated by the Distributor. Pursuant to the Class B
Plan, the Fund's Class B shares are subject to the payment of a monthly
distribution fee, which is an expense of the Class B shares of the Fund, at the
annual rate of 0.75% of the lesser of:
(a) the aggregate gross sales of the Fund's Class B shares since the inception
of the Fund (not including reinvestment of dividends or capital gains
distributions), less the aggregate net asset value of the Fund's Class B shares
exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or upon which such charge has been
waived; or (b) the average daily net assets of the Fund's Class B shares.
The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund. Service fee as shown on the statement of
operations represents the fees for both Class A shares and Class B shares.
The Plan provides that the distribution fee is payable to NYLIFE Distributors
regardless of the amounts actually expended by NYLIFE Distributors for
distribution of the Fund's shares and service activities.
NYLIFE Distributors anticipates that its actual distribution expenditures will
substantially exceed the distribution fee received by it during the initial
years of the operation of the Plan and that in later years its expenditures may
be less than the distribution fee.
Sales Charges. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $6,117 for the six
months ended June 30, 1997. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges on redemptions of Class B shares of
$46,565 for the six months ended June 30, 1997.
Trustees Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee
of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus
reimbursement for travel and out-of-pocket expenses. The Trust allocates this
expense in proportion to the net assets of the respective Funds.
Capital. At June 30, 1997, NYLIFE Distributors held shares of Class A of the
Fund with a net asset value of $7,288,687, which represents 39.4% of the net
assets of Class A shares at period end.
Other. NYLIFE Distributors has received $10,194 for providing the Fund certain
transfer agency services for the period January 1, 1997 through April 30, 1997.
Effective May 1, 1997, MainStay Shareholder Services Inc. ("MSS"), an indirect
wholly owned subsidiary of New York Life Insurance Company, was appointed
Transfer, Dividend Disbursing and Shareholder Servicing Agent. MMS was paid
$2,376 for services rendered May 1, 1997 through June 30, 1997.
29
<PAGE>
MainStay International Equity Fund
Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $1,249 for the six months ended
June 30, 1997.
Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the six months ended June 30, 1997 amounted to
$13,921.
Note 4--Federal Income Tax:
The Fund intends to elect, to the extent provided by the regulations, to treat
$409,805 of qualifying capital losses that arose during the prior fiscal year as
if they arose on January 1, 1997.
Note 5--Purchases and Sales of Securities (in 000's):
During the six months ended June 30, 1997, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $12,483 and $9,473, respectively.
Note 6--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1997* December 31, 1996
================ =================
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold ............................ 504 1,611 644 3,197
Shares issued in reinvestment of
dividends and distributions .......... -- -- 45 217
------- ------- ------- -------
504 1,611 689 3,414
Shares redeemed ........................ (584) (1,023) (301) (878)
------- ------- ------- -------
Net increase (decrease) ................ (80) 588 388 2,536
======= ======= ======= =======
</TABLE>
- ----------
* Unaudited.
30
<PAGE>
This page intentionally left blank
31
<PAGE>
The MainStay Funds
<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund graph indicating of companies in expanding markets and are willing to accept a higher
risk/reward of with strong growth potential level of risk for higher return potential
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in a portfolio that tracks You seek a conservative way to partici-
Equity Index Fund graph indicating the makeup and returns of the pate in the growth potential of stocks+
risk/reward of S&P 500*
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Offers broad diversification into You prefer the higher return potential
INTERNATIONAL EQUITY FUND graph indicating international stock markets with of international equities or want to
risk/reward of an emphasis on risk control add diversification to your domestic
Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Fund [Horizontal bar Invests in convertible securities for You want income from securities that
graph indicating a special blend of long-term growth may offer growth potential if converted
As of 6/2/97, this Fund risk/reward of potential and dividend income into common stock
was closed to new investors. Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Balances current income with growth You seek a combination of income and
Total Return Fund graph indicating opportunities by investing in stocks, growth potential and want to manage
risk/reward of bonds, and money market instruments risk through diversification
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks undervalued stocks with You seek to maximize total return from
Value Fund graph indicating attractive dividends and a stimulus securities which may have more poten-
risk/reward of for positive change tial than the market currently sees
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's.
+ The original investment is guaranteed provided it is held for 10 years with
all dividend and capital gain distributions reinvested. If shares are
redeemed prior to or after the one-day guarantee date, the investor loses
the benefit of the guarantee with respect to those shares.
++ Investments in foreign securities may be subject to greater risks than
domestic investments. These risks include currency fluctuations, changes in
U.S. or foreign tax or currency laws, and changes in monetary policies and
economic and political conditions in foreign countries.
(S) While individual securities owned by the Government Fund may be guaranteed
by the U.S. government and its agencies, the share price of the Fund is not
guaranteed and will fluctuate with market conditions.
|| Certain of the Fund's investments may be speculative.
# Investments in the Money Market Fund are neither insured nor guaranteed by
the U.S. government and there is no assurance that the Fund will be able to
maintain a stable net asset value of $1.00 per share; investment returns
will vary with market conditions.
** A small portion of the Fund's income may be subject to state and local
taxes and the Alternative Minimum Tax. Capital gains, if any, may also be
taxed.
32
<PAGE>
INCOME FUNDS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Seeks a high level of current income You are seeking to combine high
Government Fund graph indicating consistent with safety of principal current income and safety of principal
risk/reward of primarily from U.S. government
Fund] securities (S)
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar An aggressive high-yield bond You want to maximize current income
High Yield graph indicating fund that is actively managed for and can accept the higher risk of
Corporate Bond Fund risk/reward of maximum current income|| securities with high yield potential
Fund]
- -----------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current yields and You prefer the higher return potential
International Bond Fund graph indicating competitive total return from non- of international bonds or want to
risk/reward of U.S. bonds with an emphasis on add diversification to your domestic
Fund] risk control investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating stability of principal, and liquidity, competitive yields on cash you're plan-
risk/reward of with free checkwriting# ning to spend or invest in the near future
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks current income and competi- You seek to combine the return potential
Strategic Income Fund graph indicating tive overall return by investing in of high-grade, high-yield,|| and inter-
risk/reward of a diversified portfolio of domestic national bonds and want to manage risk
Fund] and foreign debt securities++ through multimarket diversification
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are a California resident and want to
California Tax Free Fund graph indicating from both federal and California keep more of what you earn by invest-
risk/reward of income taxes consistent with ing for income that's double tax free**
Fund] preservation of capital**
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are a New York State or City resident
New York Tax Free Fund graph indicating from federal, New York State, and and want to keep more of what you earn
risk/reward of New York City income taxes consis- with income that's double or triple tax
Fund] tent with preservation of capital** free**
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are in a high federal income tax
Tax Free Bond Fund graph indicating from regular federal income tax con- bracket or want to pay less of your
risk/reward of sistent with preservation of capital** investment income to the IRS
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A word about risk and reward
The "thermometers" in the tables above show how much risk the investor must
assume and the related return potential. Generally speaking, investments with
higher return potential also carry higher risks. So, the longer the indicator
bar, the higher the risk and reward potential of the Fund.
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send any money. Shares
must be offered in the investor's state of residence.
33
<PAGE>
- --------------------------------------------------------------------------------
MAINSTAY
International Equity Fund
- --------------------------------------------------------------------------------
[GRAPHIC]
Semiannual Report
June 30, 1997
Unaudited
[LOGO] MAINSTAY (R)
FUNDS
OFFICERS & TRUSTEES
Alice T.Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
[LOGO] MAINSTAY(R) FUNDS
NYLIFE Distributors Inc.
Morris Corporate Center, Building A
300 Interpace Parkway
Parsippany, New Jersey 07054
Administrator & Distributor of The MainStay Funds
http://www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly owned subsidiary of
New York Life Insurance Company.
[LOGO] NEW YORK LIFE
This report is provided for the information of shareholders of the MainStay
International Equity Fund. It may be given to others only when preceded or
accompanied by an effective MainStay Funds prospectus. This report does not
offer to sell any securities or solicit orders to buy them.
(C)1997. All rights reserved. MSSA11-08/97
[GRAPHIC]
<PAGE>
Table of Contents
Chairperson's Letter 2
MainStay Money Market Fund Highlights 4
Portfolio Management Discussion and Analysis 5
Yields & Lipper Rankings 8
Portfolio of Investments 9
Unaudited Financial Statements 11
Notes to Financial Statements 15
The MainStay Funds 18
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
Chairperson's Letter
After a remarkable six-year period of expansion, the U.S. economy continued to
grow throughout the first half of 1997. For most investors, the overall impact
was positive, but there were some rough seas along the way.
As the stock market made gains early in the year, concerns about the possibility
of impending inflation brought increased price volatility. In late March, the
Federal Reserve Board moved to raise interest rates in an effort to slow
economic growth. Although this preemptive strike helped keep inflation in check,
the initial reaction from both the stock and bond markets was negative. As a
result, bond prices faltered and stocks tumbled more than 9% from their peak
before both markets began to stabilize.
As employment figures, earnings estimates, and other indicators began to suggest
that economic growth was slowing in the second quarter, the stock market not
only recovered lost ground, but soared to record highs. With higher valuations,
however, the market became increasingly volatile, reacting severely to any news
that could signal a shift in buying patterns or interest rates.
Positive performance, emerging concerns
Despite the volatility, domestic stock and bond markets closed the first half of
1997 with positive returns. While Malaysia and Singapore had negative results,
most international markets performed well. Given these results, many investors
are once again celebrating their good fortune. The underlying volatility,
however, should serve to remind us that the level of growth we've enjoyed for
more than six years is not typical market behavior.
Certainly no one can predict what will happen next, so it's important to keep
recent performance in perspective. We believe that having realistic
expectations, as well as a long-range plan and diversified investments can help
you work toward achieving your goals, wherever the markets may move.
Solid team approach
At MainStay(R), we believe our risk-averse approach can help provide reassurance
to many investors, particularly in uncertain times. Each MainStay Fund is
managed by a team of experienced professionals who employ disciplined investment
strategies to seek competitive returns with careful attention to downside risk.
Our team approach offers investors a combination of experience, insight, and
market perspective that few individuals could provide on their own. It also
helps provide important checks and balances in security selection, market
evaluation, and overall accountability.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
Our Fund managers believe that strong companies tend to get stronger in up
markets and perform better than average when the markets go down. Using
selection criteria appropriate to the individual Funds they manage, they may
look for specific catalysts that are likely to stimulate growth, enhance value,
or increase yield without taking on unnecessary risk.
Looking forward
As we move into the second half of 1997, we expect that an intensified focus on
inflation, interest rates, and corporate earnings will account for much of the
momentum driving the market. Regardless of how events unfold, you can be
confident that we will hold true to our disciplined management approach.
At MainStay, we believe that having a close relationship with your Registered
Representative is one of the best ways to keep your long-term focus in any
market environment. Therefore, we urge you to speak with your Registered
Representative regularly--whether the market happens to be up or down--so he or
she can understand your needs and help keep you on a steady course.
While we've seen positive results for the first half of the year, we remain
somewhat cautious. Whatever the future brings, we'll continue to provide the
information, service, and support you can consider when making decisions--and
the prudent management you depend on to pursue your long-range goals.
Sincerely,
/s/ Alice T. Kane
Alice T. Kane
July 1997
- --------------------------------------------------------------------------------
3
<PAGE>
MainStay Money Market Fund Highlights
MARKET HIGHLIGHTS
FOR THE 6 MONTHS ENDED 6/30/97
- --------------------------------------------------------------------------------
o Strong economic growth in the first quarter led to a Federal Reserve Board
move to raise interest rates 25 basis points at the end of March.
o Slower economic growth in the second quarter resulted in uncertainty over
whether the Federal Reserve Board would continue to raise interest rates.
o In this environment, longer-maturity money market securities offered higher
yields than short-dated issues and we extended maturities to add yield.
o As interest rates became more uniform across the maturity spectrum in the
second quarter, the advantages of having longer securities decreased and we
shortened our average days to maturity.
- --------------------------------------------------------------------------------
FUND HIGHLIGHTS FOR THE
6- AND 12-MONTH PERIODS ENDED 6/30/97
- --------------------------------------------------------------------------------
o For the 7-day period ended 6/30/97, the MainStay Money Market Fund provided
an effective yield of 5.17% and a current yield of 5.04% for both Class A
and Class B shares.
o The Fund's outperformance resulted from the managers' adjustments in days
to maturity and careful selection of yield-enhancing securities.
o Both share classes outperformed the average Lipper* money market fund for
the six-month and one-year periods ended 6/30/97.
o Class B shares also outperformed the average Lipper peer fund for the
5-year and 10-year periods ended 6/30/97.
- --------------------------------------------------------------------------------
- ----------
* See footnote + and table on page 8 for more information on Lipper
Analytical Services, Inc.
4
<PAGE>
Portfolio Management Discussion and Analysis
During the first half of 1997, the money market was strongly influenced by
perceptions of when and how the Federal Reserve Board (Fed) would move to adjust
interest rates. At the end of March, a preemptive 25 basis point increase in the
Federal Funds rate shifted the opportunity spectrum and raised concerns about
whether--and if so, when--the Fed would move to increase interest rates again.
Investors with short average maturities in the first quarter and longer ones in
------------------
the second were able to pick up substantial improvements in yield. Domestic
-----
money market securities tended to underperform U.S. dollar-denominated Yankee
------
issues. Other yield-enhancing securities offered attractive opportunities to
- ------
investors who could properly assess risks and reward potential.
Given this context, how did the MainStay Money Market Fund do in the first half
of 1997?
For the 7-day period ended 6/30/97, the MainStay Money Market Fund provided an
effective yield of 5.17% and a current yield of 5.04% for both Class A and Class
B shares. For the six-month, 1-year, and since-inception periods, Class A shares
outperformed the average Lipper* money market fund. Class B shares outperformed
the average Lipper peer fund over the six-month, 1-, 5-, and 10-year periods
ended 6/30/97.
What accounted for the Fund's performance?
In the first quarter, we kept the average maturity short because there was no
yield advantage to lengthening. When the Federal Reserve Board raised rates we
were well positioned. In the second quarter, we lengthened the Fund's average
maturity, which also proved to be beneficial for investors when the Fed failed
to make another move.
What gave you the confidence to lengthen the Fund's average maturity?
Amid all the speculation and conflicting reports, we looked at the overall
probability of the Fed taking further action. We saw stable unemployment, stable
inflation, and declining commodity prices. We looked at auto sales and housing
starts, which are general indicators of the rate of economic growth. On balance,
these factors gave us the confidence to extend the Fund's days to maturity in
the second quarter, and it proved to be the right decision.
Which securities helped performance the most?
In the first quarter, the Fund's floating-rate notes contributed significantly
to performance. In the second quarter, short fixed-coupon notes helped us extend
the Fund's days to maturity and enhance yield.
How far did you extend the Fund's days to maturity?
Over the first six months, the Fund's days to maturity averaged in the low to
mid-50s. In the second quarter, we went out as far as 65 days, but we didn't
make any huge bets. We tried to stay within 10 days of what we took to be the
average in the Fund's universe. An important point to
[GRAPHIC]
Average maturity
- ----------------
Maturity is the termination date of an obligation or the length of time an
income security is required to pay interest. Average maturity reflects the
average of the maturities of all income securities in a portfolio.
Yield
- -----
The income per share (or current value of a security) paid to investors over a
specified period of time as a percentage of the cost of the security. Mutual
fund yields are expressed as a percentage of the fund's current price per share.
Yankee issues
- -------------
Dollar-denominated income securities issued in the United States by foreign
banks and corporations, usually when conditions in the U.S. are more favorable
than in other markets, including the issuer's domestic market overseas.
- ----------
* See footnote and table on page 8 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
keep in mind is that when we extended the days to maturity, the yield curve was
relatively steep, so we were well paid for our decision. As the second quarter
came to a close, the yield curve flattened considerably, so we moved the Fund to
a more neutral position. If rates are relatively similar across the maturity
spectrum, there is less need to tie up the Fund's money for longer periods.
How else did you seek yield for the Fund?
We didn't put all of the Fund's money in plain vanilla domestic securities. We
do a considerable amount of research to find opportunities in asset-backed
securities, callable certificates of deposit, and Yankee issues. We have ample
research and analytics to take greater advantage of opportunities than newcomers
to these markets.
What's a callable certificate of deposit?
It's generally a 6- to 12-month CD that can be called every one or three months,
depending on what looks attractive to the issuer. We put these CDs into the Fund
at times when we think interest rates are going to be stable. But sometimes,
when you think rates are going up, the issuer will give you a higher rate, and
if the securities are called before they mature, they can become a very
attractive 3-month piece of paper. We've invested in callable CDs, but have
recently decreased the Fund's holdings as they matured.
Why have you done that?
We've taken them about as far as we can. Approximately 10% of the Fund's
holdings were in callable CDs, but we have since reduced the Fund's position to
around 2%. As volatility has decreased over the reporting period, the
attractiveness--and issuance--of callable paper has also declined.
What about asset-backed securities?
They're getting more complex. Which means that it may take more research to
become comfortable with what's out there. Historically, a security would be
backed by a single stream of receivables. Now, banks are pooling many types of
-----------
receivables in a single security. So it takes more time to evaluate securities
and determine relative values, but asset-backed securities trade inexpensively
to Treasuries, and we believe they can offer attractive opportunities.
Are there other areas where your research is benefiting the Fund?
Definitely. The Fund has added several Yankee names, which required a good deal
of research and analysis. During the first half of the year, the Fund held paper
from Japan and Europe. Of course, all of this paper is denominated in U.S.
dollars and rated in the top tier of quality, so there's no currency risk and
little credit risk.
Given the problems Japan has had in the past, investors were skeptical, which
helped us buy at attractive prices. Europe
[GRAPHIC]
Receivables
- -----------
Money owed to a business for merchandise or services.
6
<PAGE>
has also offered better opportunities than it has in the past, but it is
important to research and analyze these issues to know which names to buy.
What type of research support do you have?
We have a quantitative credit research team, experts in asset-backed securities,
and experience in managing these types of securities on a daily basis. Together,
we believe these resources help put us in a favorable position on the education
curve and help us analyze potential yield opportunities for the Fund more
effectively.
Does the size of the Fund offer any advantages?
It may. The Fund is not like some large money market funds that need to own huge
amounts of Treasury paper just to meet prospectus requirements or daily
liquidity needs. We can pretty much invest where we believe yield opportunities
- ---------
exist while maintaining quality. Additionally, we can ladder the Fund's
maturities across the spectrum, rather than having a lot of short paper to meet
daily liquidity concerns and a lot of longer paper to increase the Fund's
average days to maturity. That gives us a relatively balanced approach in
managing the Fund as compared to other money market funds, which we think is
good for investors.
What is the credit quality of the securities in the Fund's investment portfolio?
A1-P1,+ which is the highest quality rating. Much of the paper the Fund owns is
-------
backed by letters of credit. The Fund's asset-backed paper is high quality,
often overcollateralized or backed by guarantees. We're very attentive to
quality in our day-to-day management of the Fund.
What do you anticipate during the rest of the year?
We can't say exactly where interest rates will head or whether inflation will
heat up, but we're relatively optimistic. We think there will be enough earnings
improvement to keep companies growing at a modest pace, and we don't anticipate
the market trading much higher in terms of yield--at least not in the
foreseeable future. Whatever happens, we'll continue to seek as high a level of
current income as is consistent with the preservation of capital and liquidity.
Ravi Akhoury
Frank Salem
Jessica Terc
Portfolio Managers
[GRAPHIC]
Liquidity
- ---------
The ability of a security to be readily traded or exchanged for cash. Generally
speaking, the larger an issuer's capitalization, the more liquid its securities
are likely to be. For a money market fund, liquidity may refer to the amount of
cash that must be readily available to meet day-to-day redemptions.
Credit quality
- --------------
A measure of an individual issuer's ability to repay principal and interest on
its income securities--or a measure of the general credit risk of securities in
an income portfolio.
- ----------
+ Rated by Moody's Investors Service, Inc. and Standard & Poor's.
7
<PAGE>
Yields & Lipper Rankings as of 6/30/97
<TABLE>
<CAPTION>
Fund SEC yields*
- --------------------------------------------------------------------------------
7-day effective yield 7-day current yield
<S> <C> <C>
Class A 5.17% 5.04%
Class B 5.17% 5.04%
- --------------------------------------------------------------------------------
</TABLE>
Fund Lipper+ rankings & Lipper category returns as of 6/30/97
<TABLE>
<CAPTION>
Life of Fund
1 year 5 years 10 years through 6/30/97
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A 117 out of n/a n/a n/a
292 funds
Class B 117 out of 74 out of 42 out of 45 out of
292 funds 180 funds 107 funds 100 funds
Average Lipper
money market
fund 4.82% 4.09% 5.48% 5.49%
- ---------------------------------------------------------------------------------------
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investments in the
MainStay Money Market Fund are neither insured nor guaranteed by the U.S.
government and there is no assurance that the Fund will be able to maintain
a stable net asset value of $1.00 per share. Investment return and
principal value may fluctuate so that upon redemption, shares may be worth
more or less than their original cost. The administrator and adviser have
agreed to assume a portion of the expenses for the Money Market Fund. Had
these expenses not been assumed, the average 7-day yield would have been
4.86%. Yield is based on the latest 7-day period ending 6/30/97. This
expense limitation may be terminated or revised at any time.
+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales
charges. Lipper averages are not class specific. Life of Fund return is
from the period of the Class B shares' initial offering through 6/30/97.
The Fund's Class A shares were first offered to the public on 1/3/95; Class
B shares on 5/1/86.
[GRAPHIC]
8
<PAGE>
Portfolio of Investments June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
Principal Amortized
Amount Cost
============================
SHORT-TERM INVESTMENTS (100.2%)+
<S> <C> <C>
BANK NOTES (4.4%)
American Express Centurion Bank
5.66%, due 9/12/97 (b)(c) .................. $ 2,000,000 $ 1,999,959
Bank of America-Illinois
5.85%, due 9/26/97 (c) ..................... 5,000,000 4,998,330
Boatmens Credit Card Bank
5.67%, due 8/8/97 (b)(c) ................... 11,000,000 10,999,780
-----------
17,998,069
-----------
CERTIFICATE OF DEPOSIT (2.2%)
Sanwa Bank Ltd.
6.28%, due 7/10/97 (c) ..................... 9,000,000 9,001,107
-----------
COMMERCIAL PAPER (87.4%)
Allianz of America Finance Corp.
5.60%, due 10/22/97 (a) .................... 7,300,000 7,171,682
Atlantic Asset Securitization Corp.
5.57%, due 7/1/97 (a) ...................... 2,117,000 2,117,000
Banca CRT Financial Corp.
5.38%, due 9/2/97 .......................... 5,000,000 4,952,925
5.72%, due 9/16/97 ......................... 6,000,000 5,926,593
5.72%, due 11/17/97 ........................ 9,000,000 8,801,230
Banco Bradesco S.A., Grand Cayman
Series A
5.68%, due 12/1/97 ......................... 8,000,000 7,807,053
Banco Real S.A., Grand Cayman
5.60%, due 10/2/97 ......................... 5,600,000 5,518,987
Banco Rio de la Plata S.A
5.30%, due 8/25/97 ......................... 6,000,000 5,951,417
Bancomer S.A., Institucion de
Banca Multiple, Grupo
Financiero Series A
5.71%, due 10/2/97 ......................... 15,000,000 14,778,738
B.A.T. Capital Corp.
5.60%, due 8/4/97 .......................... 4,000,000 3,978,844
BCI Funding Corp.
5.41%, due 7/7/97 .......................... 10,400,000 10,390,623
5.61%, due 8/22/97 ......................... 7,000,000 6,943,277
BEAL Cayman Ltd. (Brazil) Series A
5.57%, due 8/26/97 ......................... 4,600,000 4,560,144
BHF Finance (DE) Inc.
5.68%, due 12/1/97 ......................... 5,000,000 4,879,300
BIL North America Inc.
5.60%, due 7/14/97 ......................... 10,000,000 9,979,778
Broadway Capital Corp.
5.75%, due 8/14/97 (a) ..................... 1,225,000 1,216,391
BTR Dunlop Finance Inc.
5.67%, due 11/18/97 (a) .................... 10,000,000 9,779,500
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
<TABLE>
<CAPTION>
Principal Amortized
Amount Cost
============================
<S> <C> <C>
COMMERCIAL PAPER (Continued)
China International Marine
Containers (Group) Ltd.
5.66%, due 8/5/97 .......................... $ 4,000,000 $ 3,977,989
Compagnie Bancaire USA
Finance Corp.
5.40%, due 7/21/97 ......................... 5,000,000 4,985,000
5.63%, due 7/10/97 ......................... 8,000,000 7,988,740
5.65%, due 7/10/97 ......................... 6,000,000 5,991,525
Cregem North America Inc.
5.30%, due 7/18/97 ......................... 1,600,000 1,595,996
5.62%, due 8/18/97 ......................... 12,000,000 11,910,080
Demir Funding Corp. II Series B
5.64%, due 7/16/97 ......................... 5,000,000 4,988,250
5.65%, due 7/16/97 ......................... 1,000,000 997,646
Echlin Inc.
5.62%, due 9/26/97 ......................... 3,800,000 3,748,390
Formosa Plastics Corp. U.S.A.
5.60%, due 9/2/97 .......................... 2,000,000 1,980,400
Franklin Resources Inc.
5.62%, due 8/25/97 (a) ..................... 10,000,000 9,914,139
Garanti Funding Corp. II Series B
5.63%, due 7/8/97 .......................... 5,000,000 4,994,526
5.63%, due 7/10/97 ......................... 2,700,000 2,696,200
Gotham Funding Corp.
5.72%, due 8/1/97 (a) ...................... 5,045,000 5,020,151
5.72%, due 8/7/97 (a) ...................... 3,576,000 3,554,977
Great Lakes Chemical Corp.
5.53%, due 7/3/97 (a) ...................... 2,300,000 2,299,293
Guardian Industries Corp.
5.64%, due 7/14/97 ......................... 4,500,000 4,490,835
Industrial Bank of Korea
5.70%, due 9/12/97 ......................... 10,500,000 10,378,638
5.72%, due 8/26/97 ......................... 7,850,000 7,780,152
International Lease Finance Corp.
5.55%, due 7/24/97 ......................... 7,000,000 6,975,179
Korea Development Bank
5.60%, due 7/22/97 ......................... 6,900,000 6,877,460
5.65%, due 9/3/97 .......................... 2,000,000 1,979,911
5.67%, due 8/22/97 ......................... 7,000,000 6,942,670
Merrill Lynch International
(Australia) Ltd.
5.56%, due 7/7/97 .......................... 3,050,000 3,047,174
Minmetals Capitals & Securities Inc.
5.30%, due 8/12/97 ......................... 13,000,000 12,919,617
5.67%, due 8/12/97 ......................... 4,000,000 3,973,540
Mitsui & Co. (USA) Inc.
5.61%, due 8/15/97 ......................... 3,900,000 3,872,651
Monsanto Co.
5.61%, due 9/23/97 (a) ..................... 2,000,000 1,973,820
Nacional Financiera S.N.C.,
Grand Cayman Series A
5.60%, due 8/20/97 ......................... 13,000,000 12,898,889
Pemex Capital Inc.
5.62%, due 9/26/97 ......................... 2,000,000 1,972,837
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
9
<PAGE>
MainStay Money Market Fund
<TABLE>
<CAPTION>
Principal Amortized
Amount Cost
============================
SHORT-TERM INVESTMENTS (Continued)
<S> <C> <C>
COMMERCIAL PAPER (Continued)
Petroleo Brasileiro S.A.-Petrobras
5.61%, due 7/10/97 ........................ $ 6,000,000 $ 5,991,585
Philip Morris Cos. Inc.
6.10%, due 7/1/97 ......................... 1,620,000 1,620,000
Prudential Funding Corp.
5.52%, due 7/2/97 (c) ..................... 3,780,000 3,780,000
Receivables Capital Corp.
5.61%, due 7/11/97 (a) .................... 15,000,000 14,976,625
Rubbermaid Inc.
5.55%, due 7/1/97 (a) ..................... 4,100,000 4,100,000
San Paolo U.S. Financial Co.
5.60%, due 9/11/97 ........................ 2,750,000 2,719,200
5.65%, due 7/16/97 ........................ 8,000,000 7,981,167
Songs Fuel Co.
5.60%, due 8/4/97 ......................... 2,000,000 1,989,422
Southern California Edison Co.
5.55%, due 7/23/97 ........................ 4,000,000 3,986,433
Strategic Asset Funding Corp.
5.72%, due 9/2/97 ......................... 8,000,000 7,919,920
5.75%, due 9/2/97 ......................... 3,400,000 3,365,788
Tri-Lateral Capital (USA) Inc.
5.77%, due 7/31/97 (a) .................... 1,317,000 1,310,667
Twin Towers Inc.
5.64%, due 7/17/97 (a) .................... 325,000 324,185
UNIfunding Inc.
5.39%, due 7/9/97 ......................... 10,000,000 9,988,022
5.70%, due 11/12/97 ....................... 10,000,000 9,787,833
Windmill Funding Corp.
5.65%, due 7/15/97 (a) .................... 1,000,000 997,803
------------
358,318,807
------------
FEDERAL AGENCIES (4.3%)
Federal Home Loan Bank
5.67%, due 3/5/98
(call date 9/5/97) (c) .................... 10,000,000 10,000,000
5.84%, due 11/24/97 (c) ................... 7,500,000 7,500,000
------------
17,500,000
------------
MEDIUM-TERM NOTES (1.9%)
Sony Capital Corp.
5.78%, due 8/29/97 (a)(b)(c) .............. 3,000,000 3,000,000
WMX Technologies Inc.
8.13%, due 2/1/98 (c) ..................... 5,000,000 5,052,992
------------
8,052,992
------------
Total Short-Term Investments
(Amortized Cost $410,870,975) (d) ......... 100.2% 410,870,975
Liabilities in Excess of
Cash and Other Assets ..................... (0.2) (986,678)
------------- ------------
Net Assets .................................. 100.0% $409,884,297
============= ============
</TABLE>
- ----------
(a) May be sold to institutional investors only.
(b) Floating rate. Rate shown is the rate in effect at June 30, 1997.
(c) Coupon interest bearing security.
(d) The cost stated also represents the aggregate cost for Federal income tax
purposes.
The table below sets forth the diversification of Money Market Fund investments
by industry.
<TABLE>
<CAPTION>
Amortized
Cost Percent +
==============================
INDUSTRY DIVERSIFICATION
<S> <C> <C>
Auto Parts .............................. $ 3,748,390 0.9%
Banks # ................................. 297,613,996 72.6
Brokerage ............................... 3,047,174 0.7
Building Materials ...................... 4,490,835 1.1
Chemicals ............................... 4,273,113 1.0
Conglomerates ........................... 6,872,651 1.7
Federal Agencies ........................ 17,500,000 4.3
Finance ................................. 49,404,287 12.1
Household Products ...................... 4,100,000 1.0
Insurance ............................... 7,171,682 1.7
Technology .............................. 5,052,992 1.2
Tobacco ................................. 1,620,000 0.4
Utilities ............................... 1,989,422 0.5
Utilities-Electric ...................... 3,986,433 1.0
------------- -----
410,870,975 100.2
Liabilities in Excess of
Cash and Other Assets ................. (986,678) (0.2)
------------- -----
Net Assets .............................. $ 409,884,297 100.0%
============= =====
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
# The Fund will invest more than 25% of the market value of its total assets
in the securities of banks and bank holding companies, including
certificates of deposit, bankers' acceptances and securities guaranteed by
banks and bank holding companies.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
10
<PAGE>
Statement of Assets and Liabilities as of June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investment in securities, at value (amortized cost $410,870,975) ................................................. $ 410,870,975
Cash ............................................................................................................. 328,731
Receivables:
Interest ....................................................................................................... 1,490,520
Fund shares sold ............................................................................................... 190,273
-------------
Total assets .................................................................................................. 412,880,499
-------------
LIABILITIES:
Payables:
Fund shares redeemed ........................................................................................... 911,031
Transfer agent ................................................................................................. 175,114
NYLIFE Distributors ............................................................................................ 11,120
Adviser ........................................................................................................ 5,418
Custodian ...................................................................................................... 3,017
Trustees ....................................................................................................... 2,506
Accrued expenses ................................................................................................. 160,748
Dividend payable ................................................................................................. 1,727,248
-------------
Total liabilities ............................................................................................. 2,996,202
-------------
Net assets ....................................................................................................... $ 409,884,297
=============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized:
Class A ........................................................................................................ $ 703,919
Class B ........................................................................................................ 3,395,039
Additional paid-in capital ....................................................................................... 405,796,816
Accumulated net realized loss on investments ..................................................................... (11,477)
-------------
Net assets ....................................................................................................... $ 409,884,297
=============
CLASS A
Net assets applicable to outstanding shares ...................................................................... $ 70,391,861
=============
Shares of beneficial interest outstanding ........................................................................ 70,391,861
=============
Net asset value and offering price per share outstanding ......................................................... $ 1.00
=============
CLASS B
Net assets applicable to outstanding shares ...................................................................... $ 339,492,436
=============
Shares of beneficial interest outstanding ........................................................................ 339,503,916
=============
Net asset value and offering price per share outstanding ......................................................... $ 1.00
=============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
<PAGE>
Statement of Operations for the six months ended June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Income:
Interest .................................................. $ 11,181,767
------------
Expenses:
Transfer agent ............................................ 670,247
Administration ............................................ 485,316
Advisory .................................................. 485,316
Shareholder communication ................................. 125,539
Registration .............................................. 53,989
Recordkeeping ............................................. 33,406
Custodian ................................................. 21,900
Professional .............................................. 21,295
Trustees .................................................. 5,288
Miscellaneous ............................................. 4,130
------------
Total expenses before reimbursement ...................... 1,906,426
Expense reimbursement from Administrator and Adviser ........ (512,262)
------------
Net expenses ............................................. 1,394,164
------------
Net investment income ....................................... 9,787,603
------------
REALIZED GAIN ON INVESTMENTS:
Net realized gain on investments ............................ 3,024
------------
Net increase in net assets resulting from operations ........ $ 9,790,627
============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six months
ended Year ended
June 30, December 31,
1997* 1996
------------- -------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income .................................................................. $ 9,787,603 $ 17,036,859
Net realized gain (loss) on investments ................................................ 3,024 (1,158)
------------- -------------
Net increase in net assets resulting from operations ................................... 9,790,627 17,035,701
------------- -------------
Dividends to shareholders:
From net investment income:
Class A ............................................................................... (1,607,950) (2,342,050)
Class B ............................................................................... (8,179,653) (14,694,809)
------------- -------------
Total dividends to shareholders ..................................................... (9,787,603) (17,036,859)
------------- -------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ............................................................................... 124,177,809 119,892,722
Class B ............................................................................... 308,373,833 512,217,941
Net asset value of shares issued to shareholders in reinvestment of dividends:
Class A ............................................................................... 1,442,832 2,188,847
Class B ............................................................................... 7,585,383 13,787,949
------------- -------------
441,579,857 648,087,459
Cost of shares redeemed:
Class A ............................................................................... (109,119,050) (103,071,681)
Class B ............................................................................... (293,953,016) (488,364,222)
------------- -------------
Increase in net assets derived from capital share transactions ...................... 38,507,791 56,651,556
------------- -------------
Net increase in net assets .......................................................... 38,510,815 56,650,398
NET ASSETS:
Beginning of period ...................................................................... 371,373,482 314,723,084
------------- -------------
End of period ............................................................................ $ 409,884,297 $ 371,373,482
============= =============
</TABLE>
- ----------
* Unaudited.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A Class B Class A Class B Class A Class B
---------- ----------- ---------- ----------- ---------- -----------
Six months ended Year ended Year ended
June 30, 1997* December 31, 1996 December 31, 1995
--------------------------- -------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ......... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
---------- ----------- ---------- ----------- ---------- -----------
Net investment income ......... 0.02 0.02 0.05 0.05 0.05 0.05
---------- ----------- ---------- ----------- ---------- -----------
Less dividends from
net investment income ....... (0.02) (0.02) (0.05) (0.05) (0.05) (0.05)
---------- ----------- ---------- ----------- ---------- -----------
Net asset value at
end of period ............... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
========== =========== ========== =========== ========== ===========
Total investment return (a) ... 2.46% 2.46% 4.91% 4.91% 5.51% 5.51%
Ratios (to average net assets)/
Supplemental Data:
Net investment
income ..................... 4.91%+ 4.91%+ 4.8% 4.8% 5.4% 5.4%
Net expenses ................ 0.70%+ 0.70%+ 0.7% 0.7% 0.7% 0.7%
Expenses (before
reimbursement) ............. 0.96%+ 0.96%+ 1.0% 1.0% 0.9% 0.9%
Net assets at end of
period (in 000's) ........... $70,392 $339,492 $53,890 $317,483 $34,880 $279,843
<CAPTION>
Class B
------------------------------------------------------------
September 1
through Year ended August 31
December 31 -------------------------------------------
1994** 1994 1993 1992
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net asset value at
beginning of period ......... $1.00 $1.00 $1.00 $1.00
----------- ----------- ----------- -----------
Net investment income ......... 0.02 0.03 0.03 0.04
----------- ----------- ----------- -----------
Less dividends from
net investment income ....... (0.02) (0.03) (0.03) (0.04)
----------- ----------- ----------- -----------
Net asset value at
end of period ............... $1.00 $1.00 $1.00 $1.00
=========== =========== =========== ===========
Total investment return (a) ... 1.54% 3.08% 2.71% 3.80%
Ratios (to average net assets)/
Supplemental Data:
Net investment
income ..................... 4.6%+ 3.1% 2.7% 4.0%
Net expenses ................ 0.7%+ 0.7% 0.7% 0.7%
Expenses (before
reimbursement) ............. 0.9%+ 1.0% 0.9% 1.0%
Net assets at end of
period (in 000's) ........... $221,912 $192,477 $149,907 $182,567
</TABLE>
- ----------
* Unaudited.
** The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized.
(a) Total return is not annualized.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Notes to Financial Statements (unaudited)
Note 1--Organization and Business:
The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business
Trust. The Trust is registered under the Investment Company Act of 1940, as
amended, (the "Act") as an open-end management investment company and is
comprised of fourteen funds. These financial statements and notes relate only to
MainStay Money Market Fund (the "Fund").
The Fund currently offers two classes of shares. Class A shares, whose
distribution commenced on January 3, 1995, and Class B shares each bear the same
voting (except for issues that relate solely to one class), dividend,
liquidation and other rights and conditions.
Note 2--Significant Accounting Policies:
The following is a summary of significant accounting policies followed by the
Fund:
Valuation of Fund Shares. The Fund seeks to maintain a net asset value of $1.00
per share, although there is no assurance that it will be able to do so on a
continuous basis, and it has adopted certain investment, portfolio and dividend
and distribution policies designed to enable it to do so.
Securities Valuation. Securities are valued at amortized cost, which
approximates market value. The amortized cost method involves valuing a security
at its cost on the date of purchase and thereafter assuming a constant
amortization to maturity of the difference between such cost and the value on
maturity date.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Dividends and Distributions to Shareholders. Dividends are recorded on the
ex-dividend date. Dividends are declared daily and paid monthly. Income
dividends are determined in accordance with Federal income tax regulations which
may differ from generally accepted accounting principles.
Security Transactions and Investment Income. The Fund records security
transactions on the trade date. Interest income is accrued daily and discounts
and premiums on securities purchased for the Fund are accreted and amortized,
respectively, on the constant yield method over the life of the respective
securities.
Expenses. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when allocations of direct expenses can otherwise fairly be
made. The investment income and expenses and realized and unrealized gains and
losses on investments of the Fund are allocated to separate classes of shares
based upon their relative net asset value on the date the income is earned or
expenses and realized and unrealized gains and losses are incurred.
15
<PAGE>
MainStay Money Market Fund
Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
Note 3--Fees and Related Party Policies:
Investment Advisory and Administration Fees. MacKay-Shields Financial
Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an
Investment Advisory Agreement. MacKay-Shields is a registered investment adviser
and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New
York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect
wholly-owned subsidiary of New York Life, is the Administrator for the Fund.
The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an annual
rate of the average daily net assets of 0.25% up to $300 million, 0.225% on
assets from $300 million to $700 million, 0.20% on assets from $700 million to
$1.0 billion and 0.175% on assets in excess of $1.0 billion.
The Adviser and Administrator have voluntarily agreed to assume the expenses of
the Fund to the extent that such expenses would exceed on an annualized basis
0.70% of the average daily net assets of the Fund. Such excess assumed for the
six months ended June 30, 1997, was $512,262.
Contingent Deferred Sales Charge. Even though the Fund does not assess a
contingent deferred sales charge upon redemption of Class B shares of the Fund,
the applicable contingent deferred sales charge will be assessed when shares are
redeemed from the Fund if the shareholder previously exchanged his or her
investment into the Fund from another Fund in the Trust. The Fund was advised
that NYLIFE Distributors received from shareholders the proceeds from contingent
deferred sales charges for the six months ended June 30, 1997, in the amount of
$395,702.
Trustees Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee
of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus
reimbursement for travel and out-of-pocket expenses. The Trust allocates this
expense in proportion to the net assets of the respective Funds.
Other. NYLIFE Distributors has received $39,154 for providing the Fund certain
transfer agency services for the period January 1, 1997, through April 30, 1997.
Effective May 1, 1997, MainStay Shareholder Services Inc. ("MSS"), an indirect
wholly owned subsidiary of New York Life Insurance Company, was appointed
Transfer, Dividend Disbursing and Shareholder Servicing Agent. MSS was paid
$8,076 for services rendered May 1, 1997, through June 30, 1997.
Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $6,910 for the six months ended
June 30, 1997.
16
<PAGE>
Notes to Financial Statements (unaudited) continued
Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the six months ended June 30, 1997, amounted to
$33,406.
Note 4--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1997* December 31, 1996
-------------------- --------------------
Class A Class B Class A Class B
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Shares sold .............................. 124,178 308,374 119,893 512,218
Shares issued in reinvestment of dividends 1,443 7,585 2,189 13,788
-------- -------- -------- --------
125,621 315,959 122,082 526,006
Shares redeemed .......................... (109,119) (293,953) (103,072) (488,364)
-------- -------- -------- --------
Net increase ............................. 16,502 22,006 19,010 37,642
======== ======== ======== ========
</TABLE>
- ----------
* Unaudited.
17
<PAGE>
The MainStay Funds
<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund graph indicating of companies in expanding markets and are willing to accept a higher
risk/reward of with strong growth potential level of risk for higher return potential
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in a portfolio that tracks You seek a conservative way to partici-
Equity Index Fund graph indicating the makeup and returns of the pate in the growth potential of stocks+
risk/reward of S&P 500*
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Offers broad diversification into You prefer the higher return potential
International Equity Fund graph indicating international stock markets with of international equities or want to
risk/reward of an emphasis on risk control add diversification to your domestic
Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Fund [Horizontal bar Invests in convertible securities for You want income from securities that
graph indicating a special blend of long-term growth may offer growth potential if converted
As of 6/2/97, this Fund risk/reward of potential and dividend income into common stock
was closed to new Fund]
investors.
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Balances current income with growth You seek a combination of income and
Total Return Fund graph indicating opportunities by investing in stocks, growth potential and want to manage
risk/reward of bonds, and money market instruments risk through diversification
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks undervalued stocks with You seek to maximize total return from
Value Fund graph indicating attractive dividends and a stimulus securities which may have more poten-
risk/reward of for positive change tial than the market currently sees
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's.
+ The original investment is guaranteed provided it is held for 10 years with
all dividend and capital gain distributions reinvested. If shares are
redeemed prior to or after the one-day guarantee date, the investor loses
the benefit of the guarantee with respect to those shares.
++ Investments in foreign securities may be subject to greater risks than
domestic investments. These risks include currency fluctuations, changes in
U.S. or foreign tax or currency laws, and changes in monetary policies and
economic and political conditions in foreign countries.
(S) While individual securities owned by the Government Fund may be guaranteed
by the U.S. government and its agencies, the share price of the Fund is not
guaranteed and will fluctuate with market conditions.
|| Certain of the Fund's investments may be speculative.
# Investments in the Money Market Fund are neither insured nor guaranteed by
the U.S. government and there is no assurance that the Fund will be able to
maintain a stable net asset value of $1.00 per share; investment returns
will vary with market conditions.
** A small portion of the Fund's income may be subject to state and local
taxes and the Alternative Minimum Tax. Capital gains, if any, may also be
taxed.
18
<PAGE>
<TABLE>
<CAPTION>
INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Seeks a high level of current income You are seeking to combine high
Government Fund graph indicating consistent with safety of principal current income and safety of principal
risk/reward of primarily from U.S. government
Fund] securities(S)
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar An aggressive high-yield bond You want to maximize current income
High Yield graph indicating fund that is actively managed for and can accept the higher risk of
Corporate Bond Fund risk/reward of maximum current income|| securities with high yield potential
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current yields and You prefer the higher return potential
International Bond Fund [Horizontal bar competitive total return from non- of international bonds or want to
graph indicating U.S. bonds with an emphasis on add diversification to your domestic
risk/reward of risk control investments++
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks to provide current income, You are averse to risk or want to earn
MONEY MARKET FUND graph indicating stability of principal, and liquidity, competitive yields on cash you're plan-
risk/reward of with free checkwriting# ning to spend or invest in the near future
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks current income and competi- You seek to combine the return potential
Strategic Income Fund graph indicating tive overall return by investing in of high-grade, high-yield,|| and inter-
risk/reward of a diversified portfolio of domestic national bonds and want to manage risk
Fund] and foreign debt securities++ through multimarket diversification
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Seeks high current income exempt You are a California resident and want to
California Tax Free Fund graph indicating from both federal and California keep more of what you earn by invest-
risk/reward of income taxes consistent with ing for income that's double tax free**
Fund] preservation of capital**
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are a New York State or City resident
New York Tax Free Fund graph indicating from federal, New York State, and and want to keep more of what you earn
risk/reward of New York City income taxes consis- with income that's double or triple tax
Fund] tent with preservation of capital** free**
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are in a high federal income tax
Tax Free Bond Fund graph indicating from regular federal income tax con- bracket or want to pay less of your
risk/reward of sistent with preservation of capital** investment income to the IRS
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A word about risk and reward
The "thermometers" in the tables above show how much risk the investor must
assume and the related return potential. Generally speaking, investments with
higher return potential also carry higher risks. So, the longer the indicator
bar, the higher the risk and reward potential of the Fund.
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send any money. Shares
must be offered in the investor's state of residence.
19
<PAGE>
- --------------------------------------------------------------------------------
MAINSTAY
Money Market Fund
- --------------------------------------------------------------------------------
[GRAPHIC]
Semiannual Report
June 30, 1997
Unaudited
[LOGO] MAINSTAY(R)
FUNDS
OFFICERS & TRUSTEES
Alice T. Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
[LOGO] MAINSTAY(R) FUNDS
NYLIFE Distributors Inc.
Morris Corporate Center, Building A
300 Interpace Parkway
Parsippany, New Jersey 07054
Administrator & Distributor of The MainStay Funds
http://www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly owned subsidiary of
New York Life Insurance Company.
[LOGO] NEW YORK LIFE
This report is provided for the information of shareholders of the MainStay
Money Market Fund. It may be given to others only when preceded or accompanied
by an effective MainStay Funds prospectus. This report does not offer to sell
any securities or solicit orders to buy them.
(C)1997. All rights reserved. MSSA12-08/97
[GRAPHIC]
<PAGE>
Table of Contents
Chairperson's Letter 2
MainStay New York Tax Free Fund Highlights 4
$10,000 Invested in the MainStay New York
Tax Free Fund versus Lehman Brothers
Municipal Bond Index and Inflation--
Class A & Class B Shares 5
Portfolio Management Discussion and Analysis 6
Year-by-Year & Six-Month Performance 7
Diversification of Holdings--Top 5 8
Quality Breakdown 9
Returns & Lipper Rankings 10
Portfolio of Investments 11
Unaudited Financial Statements 13
Notes to Financial Statements 17
The MainStay Funds 22
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
Chairperson's Letter
After a remarkable six-year period of expansion, the U.S. economy continued to
grow throughout the first half of 1997. For most investors, the overall impact
was positive, but there were some rough seas along the way.
As the stock market made gains early in the year, concerns about the possibility
of impending inflation brought increased price volatility. In late March, the
Federal Reserve Board moved to raise interest rates in an effort to slow
economic growth. Although this preemptive strike helped keep inflation in check,
the initial reaction from both the stock and bond markets was negative. As a
result, bond prices faltered and stocks tumbled more than 9% from their peak
before both markets began to stabilize.
As employment figures, earnings estimates, and other indicators began to suggest
that economic growth was slowing in the second quarter, the stock market not
only recovered lost ground, but soared to record highs. With higher valuations,
however, the market became increasingly volatile, reacting severely to any news
that could signal a shift in buying patterns or interest rates.
Positive performance, emerging concerns
Despite the volatility, domestic stock and bond markets closed the first half of
1997 with positive returns. While Malaysia and Singapore had negative results,
most international markets performed well. Given these results, many investors
are once again celebrating their good fortune. The underlying volatility,
however, should serve to remind us that the level of growth we've enjoyed for
more than six years is not typical market behavior.
Certainly no one can predict what will happen next, so it's important to keep
recent performance in perspective. We believe that having realistic
expectations, as well as a long-range plan and diversified investments can help
you work toward achieving your goals, wherever the markets may move.
Solid team approach
At MainStay(R), we believe our risk-averse approach can help provide reassurance
to many investors, particularly in uncertain times. Each MainStay Fund is
managed by a team of experienced professionals who employ disciplined investment
strategies to seek competitive returns with careful attention to downside risk.
Our team approach offers investors a combination of experience, insight, and
market perspective that few individuals could provide on their own. It also
helps provide important checks and balances in security selection, market
evaluation, and overall accountability.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
Our Fund managers believe that strong companies tend to get stronger in up
markets and perform better than average when the markets go down. Using
selection criteria appropriate to the individual Funds they manage, they may
look for specific catalysts that are likely to stimulate growth, enhance value,
or increase yield without taking on unnecessary risk.
Looking forward
As we move into the second half of 1997, we expect that an intensified focus on
inflation, interest rates, and corporate earnings will account for much of the
momentum driving the market. Regardless of how events unfold, you can be
confident that we will hold true to our disciplined management approach.
At MainStay, we believe that having a close relationship with your Registered
Representative is one of the best ways to keep your long-term focus in any
market environment. Therefore, we urge you to speak with your Registered
Representative regularly--whether the market happens to be up or down--so he or
she can understand your needs and help keep you on a steady course.
While we've seen positive results for the first half of the year, we remain
somewhat cautious. Whatever the future brings, we'll continue to provide the
information, service, and support you can consider when making decisions--and
the prudent management you depend on to pursue your long-range goals.
Sincerely,
/s/ Alice T. Kane
Alice T. Kane
July 1997
- --------------------------------------------------------------------------------
3
<PAGE>
MainStay New York Tax Free Fund Highlights
MARKET HIGHLIGHTS
FOR THE 6 MONTHS ENDED 6/30/97
- --------------------------------------------------------------------------------
o Aside from the delay in passing the state budget, the first half of 1997
was a relatively uneventful period in the New York municipal market.
o Although the Federal Funds rate increased in March, economic growth slowed
in the second quarter and the market tended to trade in a relatively narrow
range for most of the first half of the year.
o Stock market gains reduced demand for New York municipal bonds, but low new
issuance and the large amount of calls and prerefundings in the past few
years helped keep supply manageable.
o High-coupon, short-duration bonds did better in the first quarter and
low-coupon, longer-duration bonds did better in the second quarter.
- --------------------------------------------------------------------------------
FUND HIGHLIGHTS FOR THE
6- AND 12-MONTH PERIODS ENDED 6/30/97
- --------------------------------------------------------------------------------
o One-year total returns of 7.35% and 7.08% for Class A shares and Class B
shares, respectively, excluding all sales charges, as of 6/30/97.
o Prerefundings and selected buy and sell opportunities provided the Fund
with increased total return.
o While the Fund did not make any major duration calls, having a slightly
longer-than-neutral duration when interest rates rose in late March had a
negative impact on performance.
o Both share classes underperformed the average Lipper* New York municipal
debt fund for the six months ended 6/30/97.
- --------------------------------------------------------------------------------
- ----------
* See footnote + and table on page 10 for more information on Lipper
Analytical Services, Inc.
4
<PAGE>
$10,000 Invested in the MainStay
New York Tax Free Fund versus
Lehman Brothers Municipal Bond
Index and Inflation
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Lehman Brothers
New York Tax Municipal
Period-end Free Fund Bond Index* Inflation+
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
10/1/91 $ 9,550.00 $10,000.00 $10,000.00
12/91 $ 9,748.8O $10,335.00 $10,051.00
12/92 $10,627.6O $11,247.00 $10,349.00
12/93 $11,915.5O $12,628.00 $10,632.00
12/94 $11,353.2O $11,975.00 $10,908.00
12/95 $13,166.8O $14,066.00 $11,192.00
12/96 $13,569.3O $14,689.00 $11,563.00
6/97 $13,945.00 $15,159.00 $11,642.00
</TABLE>
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Lehman Brothers
New York Tax Municipal
Period-end Free Fund Bond Index* Inflation+
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
10/1/91 $10,000.00 $10,000.00 $10,000.00
12/91 $10,208.20 $10,335.00 $10,051.00
12/92 $11,128.40 $11,247.00 $10,349.00
12/93 $12,477.00 $12,628.00 $10,632.00
12/94 $11,888.20 $11,975.00 $10,908.00
12/95 $13,750.90 $14,066.00 $11,192.00
12/96 $14,145.00 $14,689.00 $11,563.00
6/97 $14,377.00 $15,159.00 $11,642.00
</TABLE>
- ----------
The Class A graph assumes an initial investment of $10,000 made on 10/1/91
reflecting the effect of the 4.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,550. The Class B graph assumes
an initial investment of $10,000 made on 10/1/91 and includes the
historical performance of the Class A shares for periods from inception
(10/1/91) through 12/31/94. Returns shown reflect the Contingent Deferred
Sales Charge (CDSC) of 1%, as it would apply for the period shown. (The
$10,000 invested in the Lehman Brothers Municipal Bond Index begins on
9/30/91.) All results include reinvestment of distributions at net asset
value and the change in share price for the stated period. Past performance
is no guarantee of future results.
* The Lehman Brothers Municipal Bond Index (which does not have a sales
charge) includes approximately 15,000 municipal bonds rated Baa or better
by Moody's with a maturity of at least two years. Bonds subject to the
Alternative Minimum Tax or with floating or zero coupons are excluded. The
Index is unmanaged and results assume the reinvestment of all income and
capital gain distributions.
+ Inflation is represented by the Consumer Price Index (CPI), which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.
[GRAPHIC]
5
<PAGE>
Portfolio Management Discussion and Analysis
For the first six months of 1997, the New York municipal market was relatively
quiet. While the State once again struggled to pass a budget, fiscal
responsibility appeared to reign and there were no major disturbances or credit
concerns. Overall, New York City continues to benefit from lower crime and the
strength of Wall Street. Long Island is diversifying its economic base, and
while upstate regions are doing better, they continue to lag the national
averages in terms of economic growth.
Although the market rallied a little in the beginning of the year, prices
declined in March as the economy appeared to be heating up. When the Federal
Reserve Board moved to raise interest rates, prices dropped even further, but in
the second quarter, moderate economic growth led to a rally in bond prices.
Overall, municipals tended to trade within a relatively narrow range over the
first half of the year, without any major incidents or market upsets.
Supply and demand were affected by stock market gains, which drew money away
- -----------------
from the New York municipal market. Fortunately, prerefundings made in earlier
-------------
years, calls, and low new issuance reduced supply and helped the market deal
with weakening demand.
Liquidity continued to decline, yield spreads tightened, and several
-------------
broker/dealers left the municipal market to pursue higher profit potential
elsewhere. Municipal quality generally increased as the cost of insurance
continued to decline for new issues. With fewer issues offering yield
advantages, individual security selection became increasingly important in
identifying municipal bond opportunities.
Given this context, how did the MainStay New York Tax Free Fund do during the
first half of 1997?
For the six months ended 6/30/97, the MainStay New York Tax Free Fund returned
2.77% and 2.67% for Class A shares and Class B shares, respectively, excluding
all sales charges. Both share classes underperformed the average Lipper* New
York municipal debt fund, which returned 2.96% over the reporting period.
What factors were the major contributors to the Fund's underperformance?
In the first quarter, we believed inflation would remain modest and economic
growth would continue to be favorable. As a result, the Fund had a slightly
longer duration than our competitors when the Federal Reserve Board moved to
--------
raise interest rates, and this negatively impacted performance. Although we
quickly went back to a neutral duration for the Fund and have remained there
ever since, the Fund suffered a setback that would take much of the second
quarter to undo.
How did you seek to provide attractive yields for municipal investors?
With the increase in insured credits, today about half of the municipal issues
---------------
available are rated AAA or carry insurance that gives them equivalent
characteristics. As a result, it's easy to find quality, but difficult to find
yield. We have reduced the Fund's holdings among AA-rated and A-rated paper,
which
[GRAPHIC]
Supply and demand
- -----------------
In the bond market, supply is influenced by the amount of new securities issued
and the amount of bonds investors wish to sell. Demand reflects the amount of
bonds investors wish to buy, which may decrease when other markets offer greater
opportunities.
Prerefunding
- ------------
Returning principal prior to the initial date at which a bond can be called or
"refunded" (usually 10 years after issuance). In order to prerefund, the issuer
must return the par value of the bond and provide or guarantee interest payments
through the initial call date.
- ----------
* See footnote and table on page 10 for more information on Lipper Analytical
Services, Inc.
6
<PAGE>
YEAR-BY-YEAR & SIX-MONTH PERFORMANCE
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period-end Total Return %
- ----------- --------------
<S> <C>
12/91 2.08
12/92 8.98
12/93 12.11
12/94 -4.71
12/95 15.97 Class A
12/95 15.67 Class B
12/96 3.06 Class A
12/96 2.86 Class B
6/97 2.77 Class A
6/97 2.67 Class B
</TABLE>
- ----------
Returns are for Class A shares unless otherwise noted. See footnote * on page 10
for more information on performance.
we believe offer insufficient yield advantages relative to the highest-quality
securities. Instead, we've looked for opportunities in BBB-rated paper. We
believe these securities offer potentially higher yields.
Can you be specific?
Sure. In the past, we have found opportunities among BBB-rated hospital issues.
Over the years, negative press about hospitals and health care issues has caused
these issues to be oversold. As we've seen opportunities to buy at advantageous
prices, we have done so, and as yield spreads have narrowed, the Fund has
benefited. As hospital quality and utilization have improved, some of these
credits have become stronger. We continue to hold BBB hospital issues and
believe they offer attractive compensation to investors.
If you want higher yields, why not invest in noninvestment-grade securities?
While some of our competitors have invested in high-yield municipals to improve
their returns, the MainStay New York Tax Free Fund is unable to do so. According
to the prospectus, the Fund may not invest in any securities rated below "medium
grade." The Fund's BBB-rated bonds have provided competitive returns, but we
don't want to compromise quality for yield. In fact, the overall quality rating
of the Fund's investment portfolio is AA, which we feel is appropriate for the
Fund's investors and our risk-management strategy at this time.
Are there other steps you take to manage risk?
Yes, we seek to diversify geographically within the state as well as in the
types of issues we buy. As a result, the Fund owns everything from bridge,
tunnel, and airport bonds to hospital, highway, and school securities. Of
course, with a single-state fund, the opportunities for diversification are
naturally limited, so we've also invested in Puerto Rican bonds, which offer the
same tax advantages and are sometimes attractively priced. The limitations of a
state-specific Fund mean that when the New York economy suffers, the impact can
be expected to be reflected in the Fund's performance.
[GRAPHIC]
Yield spread
- ------------
The difference in yield between securities in different market sectors, such as
Treasury securities and municipal bonds--or between different securities in a
single sector, such as municipal bonds with different credit ratings.
Duration
- --------
A measure of average maturity, which adjusts for the time value of the payments
investors will receive, and which takes into account interest payments as well
as principal payments. Duration is a better gauge of interest-rate sensitivity
than average maturity alone.
Insured credits
- ---------------
Bonds that carry insurance or other guarantees that interest and principal
payments will be met. Although such insurance may increase the cost of the bond,
it also reduces the risk of default, regardless of the issuer's credit quality.
7
<PAGE>
DIVERSIFICATION OF HOLDINGS--TOP 5 AS OF 6/30/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Holdings Percentage
- ----------------------------------------------------------
<S> <C>
Transportation 18.1%
Water Utility 11.7%
Special Tax 11.3%
County/City/Special District-General Obligation 11.3%
Hospital/Nursing Home 10.5%
All Other 37.1%
</TABLE>
- ----------
Actual percentages will vary over time.
How do you seek to protect yields over time?
Since we're investing for the long term, we need to watch when the Fund's bonds
can be called--redeemed by the issuer prior to their stated maturity--to provide
the Fund's investment portfolio with a measure of call protection and reduce the
probability of having to reinvest at unattractive rates. During the first half
of the year, we've been continually extending our call dates with newer or
longer issues. While many of these transactions are neutral in terms of
performance, the net effect is to help improve call protection for the Fund's
investors.
What were the Fund's best performing securities during the reporting period?
In selecting securities, we generally look for prerefunding potential.
Prerefunding can help boost performance by ensuring that investors receive the
full value of the bond and the full value of interest payments to the call date,
even before it arrives. By far, the Fund's best performers during the first half
of 1997 were a couple of New York State Medical Care Facilities bonds and a New
York City general obligation bond that prerefunded.
What else did well for the portfolio?
The Fund's holdings of New York State Dormitory Authority zero-coupon bonds
performed well. Their long duration paid off in the second quarter. We also
managed to purchase another New York City general obligation bond at a market
low--and we knew these bonds would be scarce.
Why would New York City general obligation bonds be scarce?
While New York City is the nation's largest municipal issuer, it has reached its
debt issuance limit. In the future the city will issue bonds through the New
York City Transitional Finance Authority. But in the meantime, we saw an
opportunity in the city's general obligation bonds and it has worked well for
the Fund.
Were there other pockets of strong performance?
Yes. Generally speaking, high-coupon, short-duration bonds did well in the first
[GRAPHIC]
8
<PAGE>
quarter. Low-coupon, long-duration bonds performed better in the second quarter.
We quickly turned over a JFK International Airport bond in April, realizing an
attractive profit. We also bought some new issue Puerto Rican Building Authority
bonds and a Port Authority of New York bond at low prices and sold them both at
a profit in June.
Which securities underperformed during the first half of the year?
While some of the Fund's New York City general obligation and New York Medical
Care Facilities bonds prerefunded, others with similar coupons and maturities
underperformed, particularly in the second quarter, due to their short duration.
We also sold New York Industrial Development bonds for the Rockefeller
Foundation at a market low, which negatively impacted the Fund.
What is your outlook going forward?
We're currently maintaining a neutral duration, but revisiting that decision
weekly. We believe that if growth remains moderate and inflation doesn't heat
up, it should be good for bonds. But with low unemployment, wage increases could
trigger inflation, so the future remains uncertain. We'll continue to manage the
Fund seeking a high level of current income free from regular federal income tax
and New York City and State personal income tax,+ consistent with the
preservation of capital.
Ravi Akhoury
James Flood
Portfolio Managers
QUALITY BREAKDOWN AS OF 6/30/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Quality Percentage
- ------------------------------------------------------------
<S> <C>
AAA 53.2%
AA 9.4%
A 15.9%
BBB 18.1%
Cash, Equivalents & Other Assets, less Liabilities 3.4%
</TABLE>
- ----------
Actual percentages will vary over time. Bond quality ratings provided by
Standard & Poor's. See the prospectus for details.
[GRAPHIC]
- ----------
+ A small portion of income may be subject to state and local taxes and the
Alternative Minimum Tax. Capital gains, if any, may also be taxed.
9
<PAGE>
Returns & Lipper Rankings as of 6/30/97
<TABLE>
<CAPTION>
Fund average annual total returns*
- --------------------------------------------------------------------------------
1 year 5 years Life of Fund through 6/30/97
<S> <C> <C> <C>
Class A 7.35% 6.46% 6.80%
Class B 7.08% 6.34% 6.70%
- --------------------------------------------------------------------------------
<CAPTION>
Fund SEC returns*
- --------------------------------------------------------------------------------
1 year 5 years Life of Fund through 6/30/97
<S> <C> <C> <C>
Class A 2.52% 5.48% 5.95%
Class B 2.08% 6.03% 6.57%
- --------------------------------------------------------------------------------
<CAPTION>
Fund Lipper+ rankings & Lipper category returns as of 6/30/97
- --------------------------------------------------------------------------------
1 year 5 years Life of Fund through 6/30/97
<S> <C> <C> <C>
Class A 64 out of 23 out of 26 out of
90 funds 43 funds 42 funds
Class B 76 out of n/a n/a
90 funds
Average Lipper
NY municipal
debt fund 7.71% 6.31% 6.86%
- --------------------------------------------------------------------------------
<CAPTION>
Fund per share net asset values & distributions for the six months ended 6/30/97
- --------------------------------------------------------------------------------
NAV 6/30/97 Income Capital Gains
<S> <C> <C> <C>
Class A $9.94 $0.2400 $0.0000
Class B $9.87 $0.2280 $0.0000
- --------------------------------------------------------------------------------
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested. Performance figures
reflect the assumption of certain Fund expenses by the Fund's administrator
and adviser. Had these expenses not been assumed, total return figures
would have been lower. This expense limitation may be terminated or revised
at any time.
Class B shares, first offered to the public on 1/3/95, are sold with no
initial sales charge, but are subject to a maximum CDSC of up to 5% if
shares are redeemed during the first 6 years of purchase and an annual
12b-1 fee of up to .50%. Performance figures for this class include the
historical performance of the Class A shares for periods from inception
(10/1/91) up to 12/31/94. Performance data for the two classes after this
date vary based on differences in their expense structures. Class A shares
are sold with a maximum initial sales charge of 4.5% and a 12b-1 fee of
.25%.
+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales
charges. Lipper averages listed above are not class specific. Life of Fund
return is from the period of the Class A shares' initial offering through
6/30/97. Class B shares were first offered to the public on 1/3/95; Class A
shares on 10/1/91.
[GRAPHIC]
10
<PAGE>
Portfolio of Investments June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
Principal
Amount Value
==============================
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (96.6%)+
NEW YORK (93.2%)
Battery Park City Authority Revenue
Series A
5.50%, due 11/1/26 ......................... $ 900,000 $ 874,125
Metropolitan Transportation
Authority Service Contract
Commuter Facilities Revenue
Series L
7.50%, due 7/1/17 .......................... 835,000 877,752
Municipal Assistance Corp.
New York City, Series 67
7.625%, due 7/1/08 ......................... 800,000 866,000
Nassau County General Obligation
Series T
5.20%, due 9/1/15 .......................... 650,000 635,375
New York City General Obligation
Series G
6.00%, due 10/15/26 ........................ 925,000 933,094
Series C
7.20%, due 8/15/15 ......................... 355,000 382,512
7.50%, due 8/1/20 .......................... 25,000 27,844
Series F
8.20%, due 11/15/04 ........................ 95,000 107,706
New York City Housing Authority
Multifamily Revenue, Series A
5.65%, due 7/1/10 .......................... 250,000 250,625
New York City Municipal
Finance Authority, Water and Sewer
System Revenue, Series B
5.50%, due 6/15/27 ......................... 900,000 875,250
5.75%, due 6/15/29 ......................... 900,000 897,750
New York City Trust
Cultural Resources Revenue
Botanical Garden
5.80%, due 7/1/26 .......................... 950,000 960,688
New York State Dormitory Authority
Revenue, Manhattanville
(zero coupon), due 7/1/19 .................. 2,175,000 647,062
(zero coupon), due 7/1/21 .................. 1,175,000 312,844
Park Ridge Housing Income Project
7.85%, due 2/1/29 .......................... 800,000 850,000
New York State Energy Research &
Development Authority
Gas Facilities Revenue
Brooklyn Union Gas Co., Project
5.50%, due 1/1/21 .......................... 900,000 885,375
Electric Co. Facilities Revenue
Con Edison, Project B
9.25% due 9/15/22 (a) ...................... 45,000 46,287
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
<TABLE>
<CAPTION>
Principal
Amount Value
==============================
<S> <C> <C>
NEW YORK (Continued)
New York State Environmental
Facilities Corp. Pollution Control
Revenue, State Water
Series A
4.65%, due 6/15/07 ......................... $ 395,000 $ 386,606
New York State Housing Finance
Agency Service Contract Obligation
Revenue, Series A
7.65%, due 3/15/05 ......................... 60,000 66,450
New York State Local Government
Assistance Corp.
(zero coupon), due 4/1/14 .................. 1,500,000 603,750
New York State Medical Care Facilities
Finance Agency Revenue
7.50%, due 2/15/21 ......................... 315,000 346,106
7.80%, due 2/15/19 ......................... 310,000 330,537
7.875%, due 8/15/20 ........................ 55,000 60,294
8.875%, due 8/15/07 ........................ 605,000 620,194
St. Francis Hospital of Roslyn
Project A
7.625%, due 11/1/21 ........................ 1,035,000 1,099,688
New York State Urban Development
Corp. Revenue
5.50%, due 7/1/22 .......................... 900,000 867,375
Niagara Falls, New York, Bridge
Commission Toll Revenue
Series B
5.25%, due 10/1/15 ......................... 715,000 703,381
Port Authority of New York &
New Jersey Consolidated Bonds
Series 190
5.375%, due 1/15/32 ........................ 750,000 720,000
Series 52
9.00%, due 11/1/24 ......................... 150,000 164,438
Triborough Bridge & Tunnel Authority
of New York, General Purpose
Revenue, Series L
8.125%, due 1/1/12 ......................... 850,000 882,589
----------
17,281,697
----------
PUERTO RICO (3.4%)
Puerto Rico Commonwealth
Infrastructure Special Financing
Authority, Series A
7.90%, due 7/1/07 .......................... 600,000 631,098
----------
631,098
----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
<PAGE>
MainStay New York Tax Free Fund
<TABLE>
<CAPTION>
Value
===========
<S> <C> <C>
Total Investments
(Cost $17,784,748) (b) ..................... 96.6% $17,912,795(c)
Cash and Other Assets, Less Liabilities ...... 3.4 621,701
===== ===========
Net Assets ................................... 100.0% $18,534,496
===== ===========
</TABLE>
- ----------
(a) Interest on these securities is subject to alternative minimum tax.
(b) The cost stated also represents the aggregate cost for Federal income tax
purposes.
(c) At June 30, 1997, net unrealized appreciation was $128,048, based on cost
for Federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $355,106 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $227,058.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE>
Statement of Assets and Liabilities as of June 30, 1997 (unaudited)
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $17,784,748) ............................................. $17,912,795
Cash ......................................................................................................... 49,363
Receivables:
Interest ................................................................................................... 384,190
Investment securities sold ................................................................................. 300,905
Fund shares sold ........................................................................................... 10,058
Variation margin receivable on futures contracts ............................................................. 487
-----------
Total assets .............................................................................................. 18,657,798
-----------
LIABILITIES:
Payables:
NYLIFE Distributors ........................................................................................ 6,736
Transfer agent ............................................................................................. 3,252
Adviser .................................................................................................... 1,957
Custodian .................................................................................................. 786
Trustees ................................................................................................... 163
Accrued expenses ............................................................................................. 36,661
Dividend payable ............................................................................................. 73,747
-----------
Total liabilities ......................................................................................... 123,302
-----------
Net assets ................................................................................................... $18,534,496
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized:
Class A .................................................................................................... $ 13,867
Class B .................................................................................................... 4,811
Additional paid-in capital ................................................................................... 18,345,303
Accumulated undistributed net investment income .............................................................. 21,394
Accumulated net realized gain on investments ................................................................. 21,073
Unrealized appreciation on investments ....................................................................... 128,048
-----------
Net assets ................................................................................................... $18,534,496
===========
CLASS A
Net assets applicable to outstanding shares .................................................................. $13,788,550
===========
Shares of beneficial interest outstanding .................................................................... 1,386,667
===========
Net asset value per share outstanding ........................................................................ $ 9.94
Maximum sales charge (4.50% of offering price) ............................................................... 0.47
-----------
Maximum offering price per share outstanding ................................................................. $ 10.41
===========
CLASS B
Net assets applicable to outstanding shares .................................................................. $ 4,745,946
===========
Shares of beneficial interest outstanding .................................................................... 481,052
===========
Net asset value and offering price per share outstanding ..................................................... $ 9.87
===========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
Statement of Operations for the six months ended June 30, 1997 (unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Interest ..................................................... $ 592,835
---------
Expenses:
Administration ............................................... 23,407
Advisory ..................................................... 23,407
Service ...................................................... 23,407
Shareholder communication .................................... 19,011
Transfer agent ............................................... 16,960
Professional ................................................. 10,864
Custodian .................................................... 10,353
Distribution--Class B ........................................ 5,434
Registration ................................................. 846
Trustees ..................................................... 253
Miscellaneous ................................................ 2,978
---------
Total expenses before reimbursement ......................... 136,920
Expense reimbursement from Adviser and Administrator ........... (15,385)
---------
Net expenses ................................................ 121,535
---------
Net investment income .......................................... 471,300
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from:
Security transactions ........................................ 184,415
Futures transactions ......................................... (14,104)
---------
Net realized gain on investments ............................... 170,311
---------
Net change in unrealized appreciation on investments:
Security transactions ........................................ (132,925)
Futures transactions ......................................... (1,125)
---------
Net unrealized loss on investments ............................. (134,050)
---------
Net realized and unrealized gain on investments ................ 36,261
---------
Net increase in net assets resulting from operations ........... $ 507,561
=========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six months
ended Year ended
June 30, December 31,
1997* 1996
============ ============
<S> <C> <C>
DECREASE IN NET ASSETS:
Operations:
Net investment income ........................................................ $ 471,300 $ 978,259
Net realized gain on investments ............................................. 170,311 178,029
Net change in unrealized appreciation on investments ......................... (134,050) (553,341)
------------ ------------
Net increase in net assets resulting from operations ......................... 507,561 602,947
------------ ------------
Dividends to shareholders:
From net investment income:
Class A ..................................................................... (350,265) (860,400)
Class B ..................................................................... (102,920) (132,523)
------------ ------------
Total dividends to shareholders ........................................... (453,185) (992,923)
------------ ------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ..................................................................... 371,545 714,259
Class B ..................................................................... 1,006,890 2,775,763
Net asset value of shares issued to shareholders in reinvestment of dividends:
Class A ..................................................................... 117,215 326,939
Class B ..................................................................... 44,632 87,529
------------ ------------
1,540,282 3,904,490
Cost of shares redeemed:
Class A ..................................................................... (2,310,794) (3,316,131)
Class B ..................................................................... (421,210) (362,803)
------------ ------------
Increase (decrease) in net assets derived from capital share transactions . (1,191,722) 225,556
------------ ------------
Net decrease in net assets ................................................ (1,137,346) (164,420)
NET ASSETS:
Beginning of period ............................................................ 19,671,842 19,836,262
------------ ------------
End of period .................................................................. $ 18,534,496 $ 19,671,842
============ ============
Accumulated undistributed net investment income ................................ $ 21,394 $ 3,279
============ ============
</TABLE>
- ----------
* Unaudited.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A Class B Class A Class B Class A Class B
========== ========== ========== ========== ========== ==========
Six months ended Year ended Year ended
June 30, 1997* December 31, 1996 December 31, 1995
========================== ========================= =========================
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period .......... $9.91 $9.84 $10.12 $10.02 $9.20 $9.20
---------- ---------- ---------- ---------- ---------- ----------
Net investment income .......... 0.24 0.23 0.50 0.45 0.52 0.59
Net realized and
unrealized gain (loss)
on investments ............... 0.03 0.03 (0.21) (0.18) 0.91 0.82
---------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations ................... 0.27 0.26 0.29 0.27 1.43 1.41
---------- ---------- ---------- ---------- ---------- ----------
Less dividends and
distributions:
From net investment
income ....................... (0.24) (0.23) (0.50) (0.45) (0.51) (0.59)
From net realized gain
on investments ............... -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total dividends and
distributions ................ (0.24) (0.23) (0.50) (0.45) (0.51) (0.59)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value at end
of period .................... $9.94 $9.87 $9.91 $9.84 $10.12 $10.02
========== ========== ========== ========== ========== ==========
Total investment return(b) 7.35% 7.08% 3.06% 2.86% 15.97% 15.67%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income ................... 5.09%+ 4.84%+ 5.0% 4.7% 5.4% 5.1%
Net expenses .............. 1.24%+ 1.49%+ 1.24% 1.49% 1.24% 1.49%
Expenses (before
reimbursement) ........... 1.40%+ 1.65%+ 1.4% 1.6% 1.4% 1.6%
Portfolio turnover rate ........ 81% 81% 114% 114% 114% 114%
Net assets at end of
period (in 000's) ............ $13,789 $4,746 $15,572 $4,100 $18,248 $1,588
<CAPTION>
Class A
=============================================================
September 1 Year ended
through August 31 October 1, 1991(a)
December 31 ========================= through
1994** 1994 1993 August 31, 1992
========== ========== ========== =================
<S> <C> <C> <C> <C>
Net asset value at
beginning of period .......... $9.58 $10.43 $9.95 $9.55
---------- ---------- ---------- ----------
Net investment income .......... 0.19 0.56 0.60 0.49
Net realized and
unrealized gain (loss)
on investments ............... (0.39) (0.59) 0.54 0.34
---------- ---------- ---------- ----------
Total from investment
operations ................... (0.20) (0.03) 1.14 0.83
---------- ---------- ---------- ----------
Less dividends and
distributions:
From net investment
income ....................... (0.18) (0.57) (0.65) (0.43)
From net realized gain
on investments ............... -- (0.25) (0.01) --
---------- ---------- ---------- ----------
Total dividends and
distributions ................ (0.18) (0.82) (0.66) (0.43)
---------- ---------- ---------- ----------
Net asset value at end
of period .................... $9.20 $9.58 $10.43 $9.95
========== ========== ========== ==========
Total investment return(b) (2.11%) (0.35%) 11.88% 8.95%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income ................... 6.1%+ 5.7% 6.0% 5.9%+
Net expenses .............. 0.99%+ 0.99% 0.98% 0.99%+
Expenses (before
reimbursement) ........... 1.2%+ 1.1% 1.2% 1.5%+
Portfolio turnover rate ........ 39% 169% 131% 23%
Net assets at end of
period (in 000's) ............ $17,106 $17,862 $15,665 $10,605
</TABLE>
- ----------
* Unaudited.
** The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized.
(a) Commencement of operations.
(b) Total return is calculated exclusive of sales charges and is not
annualized.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE>
Notes to Financial Statements (unaudited)
Note 1--Organization and Business:
The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business
Trust. The Trust is registered under the Investment Company Act of 1940, as
amended, (the "Act") as an open-end management investment company and is
comprised of fourteen funds. These financial statements and notes relate only to
MainStay New York Tax Free Fund (the "Fund").
The Fund currently offers two classes of shares. Class A shares are offered at
net asset value per share plus an initial sales charge. Class B shares whose
distribution commenced on January 3, 1995, are offered without an initial sales
charge, although a declining contingent deferred sales charge may be imposed on
redemptions made within six years of purchase. Class A shares and Class B shares
bear the same voting (except for issues that relate solely to one class),
dividend, liquidation and other rights and conditions except that the Class B
shares are subject to higher distribution fee rates. Each class of shares bears
distribution and/or service fee payments under a distribution plan pursuant to
Rule 12b-1 under the Investment Company Act of 1940.
Note 2--Significant Accounting Policies:
The following is a summary of significant accounting policies followed by the
Fund:
Valuation of Fund Shares. The net asset value per share of each class of shares
is calculated on each day the New York Stock Exchange (the "Exchange") is open
for trading as of the close of regular trading on the Exchange. The net asset
value per share of each class of shares is determined by taking the assets
attributable to a class of shares, subtracting the liabilities attributable to
that class, and dividing the result by the outstanding shares of that class.
Securities Valuation. Portfolio securities of the Fund are stated at value
determined (a) by appraising debt securities at prices supplied by a pricing
agent selected by the Adviser, whose prices reflect broker/dealer supplied
valuations and electronic data processing techniques if those prices are deemed
by the Adviser to be representative of market values at the regular close of
business of the New York Stock Exchange, (b) by appraising options and futures
contracts at the last sale price on the market where such options or futures are
principally traded, and (c) by appraising all other securities and other assets,
including debt securities for which prices are supplied by a pricing agent but
are not deemed by the Adviser to be representative of market values, but
excluding money market instruments with a remaining maturity of sixty days or
less and including restricted securities and securities for which no market
quotations are available, at fair value in accordance with procedures approved
by the Trustees. Short-term securities which mature in more than 60 days are
valued at current market quotations. Short-term securities which mature in 60
days or less are valued at amortized cost if their term to maturity at purchase
was 60 days or less, or by amortizing the difference between market value on the
61st day prior to maturity and value on maturity date if their original term to
maturity at purchase exceeded 60 days.
17
<PAGE>
MainStay New York Tax Free Fund
Events affecting the values of certain portfolio securities that occur between
the close of trading on the principal market for such securities and the regular
close of the New York Stock Exchange will not be reflected in the Fund's
calculation of net asset value unless the Adviser believes that the particular
event would materially affect net asset value, in which case an adjustment would
be made.
Futures Contracts. A futures contract is an agreement to purchase or sell a
specified quantity of an underlying instrument at a specified future date, or to
make or receive a cash payment based on the value of a securities index. During
the period the futures contract is open, changes in the value of the contract
are recognized as unrealized gains or losses by "marking to market" such
contract on a daily basis to reflect the market value of the contract at the end
of each day's trading. The Fund agrees to receive from or pay to the broker an
amount of cash equal to the daily fluctuation in the value of the contract. Such
receipts or payments are known as "variation margin". When the futures contract
is closed, the Fund records a realized gain or loss equal to the difference
between the proceeds from (or cost of) the closing transaction and the Fund's
basis in the contract. The Fund has entered into contracts for the future
delivery of debt securities in order to attempt to protect against the effects
of adverse changes in interest rates or to lengthen or shorten the average
maturity or duration of the Fund's portfolio.
The use of futures contracts involves, to varying degrees, elements of market
risk. Risks arise from the possible imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets, and
the possible inability of counterparties to meet the terms of their contracts.
However, the Fund's activities in futures contracts are conducted through
regulated exchanges which minimize counterparty credit risks.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Dividends and Distributions to Shareholders. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
monthly. Income dividends and capital gain distributions are determined in
accordance with Federal income tax regulations which may differ from generally
accepted accounting principles.
Security Transactions and Investment Income. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Interest income is
accrued daily except when collection is not expected. Premiums on securities
purchased by the Fund are amortized on the constant yield method over the life
of the respective securities or, if applicable, over the period to the first
call date. Discounts are accreted when required by Federal tax regulations.
18
<PAGE>
Notes to Financial Statements (unaudited) continued
Expenses. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when allocations of direct expenses can otherwise fairly be
made. The investment income and expenses (other than expenses incurred under the
Distribution Plan) and realized and unrealized gains and losses on investments
of the Fund are allocated to separate classes of shares based upon their
relative net asset value on the date the income is earned or expenses and
realized and unrealized gains and losses are incurred.
Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
Concentration of Credit Risk. The Fund invests substantially all of its assets
in debt obligations issued by political subdivisions and authorities in the
State of New York and the Commonwealth of Puerto Rico. The issuer's ability to
meet its obligations may be affected by economic and political developments
within the State of New York and the Commonwealth of Puerto Rico.
Note 3--Fees and Related Party Policies:
Investment Advisory And Administration Fees. MacKay-Shields Financial
Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an
Investment Advisory Agreement. MacKay-Shields is a registered investment adviser
and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New
York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect
wholly-owned subsidiary of New York Life, is the Administrator for the Fund.
The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an annual
rate of 0.25% of the average daily net assets of the Fund.
The Adviser and the Administrator have voluntarily agreed to reimburse the
expenses for the Fund to the extent that operating expenses would exceed on an
annualized basis 1.24% and 1.49% for the Class A and Class B, shares
respectively, of the average daily net assets. The expense reimbursement to the
Fund for the six months ended June 30, 1997, was $15,385.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"). The
Fund, with respect to each class of shares, has adopted a Distribution Plan (the
"Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Class A Plan, the Distributor receives payments from the Fund at
an annual rate of 0.25% of the average daily net assets of the Fund's Class A
shares, which is an expense of the Class A shares of the Fund for distribution
or service activities as designated by the Distributor. Pursuant to the Class B
Plan, the Fund's
19
<PAGE>
MainStay New York Tax Free Fund
Class B shares are subject to the payment of a monthly distribution fee, which
is an expense of the Class B shares of the Fund, at the annual rate of 0.25% of
the lesser of:
(a) the aggregate gross sales of the Fund's Class B shares since the inception
of the Fund (not including reinvestment of dividends or capital gains
distributions), less the aggregate net asset value of the Fund's Class B shares
exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or upon which such charge has been
waived; or (b) the average daily net assets of the Fund's Class B shares.
The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund. Service fee as shown on the statement of
operations represents the fees for both Class A shares and Class B shares.
The Plan provides that the distribution fee is payable to NYLIFE Distributors
regardless of the amounts actually expended by NYLIFE Distributors for
distribution of the Fund's shares and service activities.
NYLIFE Distributors anticipates that its actual distribution expenditures will
substantially exceed the distribution fee received by it during the initial
years of the operation of the Plan and that in later years its expenditures may
be less than the distribution fee.
Sales Charges. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $1,728 for the six
months ended June 30, 1997. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges on redemptions of Class B shares of
$1,724 for the six months ended June 30, 1997.
Trustees Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee
of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus
reimbursement for travel and out-of-pocket expenses. The Trust allocates this
expense in proportion to the net assets of the respective Funds.
Capital. At June 30, 1997, NYLIFE Distributors and NYLIFE Securities held shares
of Class A with a net asset value of $4,964,925 and $99,400, respectively, which
represents 36.0% and 0.7%, respectively, of the Class A net assets at period
end.
Other. NYLIFE Distributors has received $607 for providing the Fund certain
transfer agency services for the period January 1, 1997, through April 30, 1997.
Effective May 1, 1997, MainStay Shareholder Services Inc. ("MSS"), an indirect
wholly owned subsidiary of New York Life Insurance Company, was appointed
Transfer, Dividend Disbursing and Shareholder Servicing Agent. MSS was paid $135
for services rendered May 1, 1997, through June 30, 1997.
20
<PAGE>
Notes to Financial Statements (unaudited) continued
Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $336 for the six months ended June
30, 1997.
Note 4--Federal Income Tax:
At December 31, 1996, for Federal income tax purposes, capital loss
carryforwards of $148,114 were available to the extent provided by regulations
to offset future realized gains of the Fund through 2002. To the extent that
these loss carryforwards are used to offset future capital gains, it is probable
that the capital gains so offset will not be distributed to shareholders. The
Fund utilized $179,154 of capital loss carryforward during the prior fiscal
year.
Note 5--Purchases and Sales of Securities (in 000's):
During the six months ended June 30, 1997, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $15,006 and $16,277, respectively.
Note 6--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1997* December 31, 1996
================== ==================
Class A Class B Class A Class B
======= ======= ======= =======
<S> <C> <C> <C> <C>
Shares sold .............................. 38 103 73 286
Shares issued in reinvestment of dividends 12 4 33 9
---- ---- ---- ----
50 107 106 295
Shares redeemed .......................... (234) (43) (338) (37)
---- ---- ---- ----
Net increase (decrease) .................. (184) 64 (232) 258
==== ==== ==== ====
</TABLE>
- ----------
* Unaudited.
21
<PAGE>
The MainStay Funds
<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund graph indicating of companies in expanding markets and are willing to accept a higher
risk/reward of with strong growth potential level of risk for higher return potential
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in a portfolio that tracks You seek a conservative way to partici-
Equity Index Fund graph indicating the makeup and returns of the pate in the growth potential of stocks+
risk/reward of S&P 500*
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Offers broad diversification into You prefer the higher return potential
International Equity Fund graph indicating international stock markets with of international equities or want to
risk/reward of an emphasis on risk control add diversification to your domestic
Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Convertible Fund [Horizontal bar Invests in convertible securities for You want income from securities that
As of 6/2/97, this Fund graph indicating a special blend of long-term growth may offer growth potential if converted
was closed to new risk/reward of potential and dividend income into common stock
investors. Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Balances current income with growth You seek a combination of income and
Total Return Fund graph indicating opportunities by investing in stocks, growth potential and want to manage
risk/reward of bonds, and money market instruments risk through diversification
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks undervalued stocks with You seek to maximize total return from
Value Fund graph indicating attractive dividends and a stimulus securities which may have more poten-
risk/reward of for positive change tial than the market currently sees
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's.
+ The original investment is guaranteed provided it is held for 10 years with
all dividend and capital gain distributions reinvested. If shares are
redeemed prior to or after the one-day guarantee date, the investor loses
the benefit of the guarantee with respect to those shares.
++ Investments in foreign securities may be subject to greater risks than
domestic investments. These risks include currency fluctuations, changes in
U.S. or foreign tax or currency laws, and changes in monetary policies and
economic and political conditions in foreign countries.
(S) While individual securities owned by the Government Fund may be guaranteed
by the U.S. government and its agencies, the share price of the Fund is not
guaranteed and will fluctuate with market conditions.
|| Certain of the Fund's investments may be speculative.
# Investments in the Money Market Fund are neither insured nor guaranteed by
the U.S. government and there is no assurance that the Fund will be able to
maintain a stable net asset value of $1.00 per share; investment returns
will vary with market conditions.
** A small portion of the Fund's income may be subject to state and local
taxes and the Alternative Minimum Tax. Capital gains, if any, may also be
taxed.
22
<PAGE>
<TABLE>
<CAPTION>
INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Seeks a high level of current income You are seeking to combine high
Government Fund graph indicating consistent with safety of principal current income and safety of principal
risk/reward of primarily from U.S. government
Fund] securities(S)
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield [Horizontal bar An aggressive high-yield bond You want to maximize current income
Corporate Bond Fund graph indicating fund that is actively managed for and can accept the higher risk of
risk/reward of maximum current income|| securities with high yield potential
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current yields and You prefer the higher return potential
International Bond Fund graph indicating competitive total return from non- of international bonds or want to
risk/reward of U.S. bonds with an emphasis on add diversification to your domestic
Fund] risk control investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating stability of principal, and liquidity, competitive yields on cash you're plan-
risk/reward of with free checkwriting# ning to spend or invest in the near future
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks current income and competi- You seek to combine the return potential
Strategic Income Fund graph indicating tive overall return by investing in of high-grade, high-yield,|| and inter-
risk/reward of a diversified portfolio of domestic national bonds and want to manage risk
Fund] and foreign debt securities++ through multimarket diversification
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are a California resident and want to
California Tax Free Fund graph indicating from both federal and California keep more of what you earn by invest-
risk/reward of income taxes consistent with ing for income that's double tax free**
Fund] preservation of capital**
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are a New York State or City resident
NEW YORK TAX FREE FUND graph indicating from federal, New York State, and and want to keep more of what you earn
risk/reward of New York City income taxes consis- with income that's double or triple tax
Fund] tent with preservation of capital** free**
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are in a high federal income tax
Tax Free Bond Fund graph indicating from regular federal income tax con- bracket or want to pay less of your
risk/reward of sistent with preservation of capital** investment income to the IRS
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A word about risk and reward
The "thermometers" in the tables above show how much risk the investor must
assume and the related return potential. Generally speaking, investments with
higher return potential also carry higher risks. So, the longer the indicator
bar, the higher the risk and reward potential of the Fund.
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send any money. Shares
must be offered in the investor's state of residence.
23
<PAGE>
- --------------------------------------------------------------------------------
MAINSTAY
New York Tax Free Fund
- --------------------------------------------------------------------------------
[GRAPHIC]
Semiannual Report
June 30, 1997
Unaudited
[LOGO] MAINSTAY(R)
FUNDS
OFFICERS & TRUSTEES
Alice T. Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
[LOGO] MAINSTAY(R) FUNDS
NYLIFE Distributors Inc.
Morris Corporate Center, Building A
300 Interpace Parkway
Parsippany, New Jersey 07054
Administrator & Distributor of The MainStay Funds
http://www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly owned subsidiary of
New York Life Insurance Company.
[LOGO] NEW YORK LIFE
This report is provided for the information of shareholders of the MainStay New
York Tax Free Fund. It may be given to others only when preceded or accompanied
by an effective MainStay Funds prospectus. This report does not offer to sell
any securities or solicit orders to buy them.
(C)1997. All rights reserved. MSSA13-08/97
[GRAPHIC]
<PAGE>
Table of Contents
Chairperson's Letter 2
MainStay Tax Free Bond Fund Highlights 4
$10,000 Invested in the MainStay Tax
Free Bond Fund versus Lehman Brothers
Municipal Bond Index and Inflation--
Class A & Class B Shares 5
Portfolio Management Discussion and Analysis 6
Year-by-Year & Six-Month Performance 7
Diversification by State--Top 5 8
Quality Breakdown 9
Returns & Lipper Rankings 10
Top 10 Holdings 11
Portfolio of Investments 12
Unaudited Financial Statements 18
Notes to Financial Statements 22
The MainStay Funds 28
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
Chairperson's Letter
After a remarkable six-year period of expansion, the U.S. economy continued to
grow throughout the first half of 1997. For most investors, the overall impact
was positive, but there were some rough seas along the way.
As the stock market made gains early in the year, concerns about the possibility
of impending inflation brought increased price volatility. In late March, the
Federal Reserve Board moved to raise interest rates in an effort to slow
economic growth. Although this preemptive strike helped keep inflation in check,
the initial reaction from both the stock and bond markets was negative. As a
result, bond prices faltered and stocks tumbled more than 9% from their peak
before both markets began to stabilize.
As employment figures, earnings estimates, and other indicators began to suggest
that economic growth was slowing in the second quarter, the stock market not
only recovered lost ground, but soared to record highs. With higher valuations,
however, the market became increasingly volatile, reacting severely to any news
that could signal a shift in buying patterns or interest rates.
Positive performance, emerging concerns
Despite the volatility, domestic stock and bond markets closed the first half of
1997 with positive returns. While Malaysia and Singapore had negative results,
most international markets performed well. Given these results, many investors
are once again celebrating their good fortune. The underlying volatility,
however, should serve to remind us that the level of growth we've enjoyed for
more than six years is not typical market behavior.
Certainly no one can predict what will happen next, so it's important to keep
recent performance in perspective. We believe that having realistic
expectations, as well as a long-range plan and diversified investments can help
you work toward achieving your goals, wherever the markets may move.
Solid team approach
At MainStay(R), we believe our risk-averse approach can help provide reassurance
to many investors, particularly in uncertain times. Each MainStay Fund is
managed by a team of experienced professionals who employ disciplined investment
strategies to seek competitive returns with careful attention to downside risk.
Our team approach offers investors a combination of experience, insight, and
market perspective that few individuals could provide on their own. It also
helps provide important checks and balances in security selection, market
evaluation, and overall accountability.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
Our Fund managers believe that strong companies tend to get stronger in up
markets and perform better than average when the markets go down. Using
selection criteria appropriate to the individual Funds they manage, they may
look for specific catalysts that are likely to stimulate growth, enhance value,
or increase yield without taking on unnecessary risk.
Looking forward
As we move into the second half of 1997, we expect that an intensified focus on
inflation, interest rates, and corporate earnings will account for much of the
momentum driving the market. Regardless of how events unfold, you can be
confident that we will hold true to our disciplined management approach.
At MainStay, we believe that having a close relationship with your Registered
Representative is one of the best ways to keep your long-term focus in any
market environment. Therefore, we urge you to speak with your Registered
Representative regularly--whether the market happens to be up or down--so he or
she can understand your needs and help keep you on a steady course.
While we've seen positive results for the first half of the year, we remain
somewhat cautious. Whatever the future brings, we'll continue to provide the
information, service, and support you can consider when making decisions--and
the prudent management you depend on to pursue your long-range goals.
Sincerely,
/s/ Alice T. Kane
Alice T. Kane
July 1997
- --------------------------------------------------------------------------------
3
<PAGE>
MainStay Tax Free Bond Fund Highlights
MARKET HIGHLIGHTS
FOR THE 6 MONTHS ENDED 6/30/97
- --------------------------------------------------------------------------------
o Overall, the first half of 1997 was a relatively uneventful period in the
municipal bond market.
o Although the Federal Funds rate increased in March, economic growth slowed
in the second quarter and the market tended to trade in a relatively narrow
range for most of the first half of the year.
o Stock market gains reduced demand for municipal securities, but low new
issuance, calls, and the large amount of prerefundings in the past few
years helped keep supply manageable.
o High-coupon, short-duration bonds did better in the first quarter and
low-coupon, longer-duration bonds did better in the second quarter.
- --------------------------------------------------------------------------------
FUND HIGHLIGHTS FOR THE
6- AND 12-MONTH PERIODS ENDED 6/30/97
- --------------------------------------------------------------------------------
o One-year total returns of 8.01% and 7.81% for Class A shares and Class B
shares, respectively, excluding all sales charges, as of 6/30/97.
o Prerefundings helped boost value within the Fund's investment portfolio,
and selected buy and sell opportunities provided the Fund with increased
total return.
o While the Fund did not make any major duration bets, having a slightly
longer-than-neutral duration when interest rates rose in late March had a
negative impact on overall performance.
o Both share classes slightly underperformed the average Lipper* municipal
debt fund for the reporting period.
- --------------------------------------------------------------------------------
- ----------
* See footnote + and table on page 10 for more information on Lipper
Analytical Services, Inc.
4
<PAGE>
$10,000 Invested in the MainStay
Tax Free Bond Fund versus Lehman Brothers
Municipal Bond Index and Inflation
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Tax Free Lehman Brothers
Period-end Bond Fund Municipal Bond Index* Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
5/1/86 $ 9,550.00 $10,000.00 $10,000.00
12/86 $10,123.40 $10,826.00 $10,193.00
12/87 $10,181.90 $10,989.00 $10,644.00
12/88 $11,074.30 $12,106.00 $11,113.00
12/89 $11,891.30 $13,412.00 $11,629.00
12/90 $12,447.60 $14,390.00 $12,355.00
12/91 $13,803.20 $16,137.00 $12,724.00
12/92 $14,965.00 $17,560.00 $13,100.00
12/93 $16,520.50 $19,717.00 $13,459.00
12/94 $15,525.40 $18,697.00 $13,809.00
12/95 $17,854.70 $21,962.00 $14,168.00
12/96 $18,503.10 $22,935.00 $14,637.00
6/97 $19,043.00 $23,669.00 $14,738.00
</TABLE>
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Tax Free Lehman Brothers
Period-end Bond Fund Municipal Bond Index* Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
5/1/86 $10,000.00 $10,000.00 $10,000.00
12/86 $10,600.40 $10,826.00 $10,193.00
12/87 $10,661.70 $10,989.00 $10,644.00
12/88 $11,596.10 $12,106.00 $11,113.00
12/89 $12,451.60 $13,412.00 $11,629.00
12/90 $13,034.10 $14,390.00 $12,355.00
12/91 $14,453.60 $16,137.00 $12,724.00
12/92 $15,670.10 $17,560.00 $13,100.00
12/93 $17,298.90 $19,717.00 $13,459.00
12/94 $16,257.00 $18,697.00 $13,809.00
12/95 $18,673.20 $21,962.00 $14,168.00
12/96 $19,295.80 $22,935.00 $14,637.00
6/97 $19,855.00 $23,669.00 $14,738.00
</TABLE>
- ----------
The Class A graph assumes an initial investment of $10,000 made on 5/1/86
reflecting the effect of the 4.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,550 and includes the historical
performance of the Class B shares for periods from inception (5/1/86)
through 12/31/94. The Class B graph assumes an initial investment of
$10,000 made on 5/1/86. Returns shown do not reflect the Contingent
Deferred Sales Charge (CDSC), as it would not apply for the period shown.
All results include reinvestment of distributions at net asset value and
the change in share price for the stated period. Past performance is no
guarantee of future results.
* The Lehman Brothers Municipal Bond Index (which does not have a sales
charge) includes approximately 15,000 municipal bonds rated Baa or better
by Moody's with a maturity of at least two years. Bonds subject to the
Alternative Minimum Tax or with floating or zero coupons are excluded. The
Index is unmanaged and results assume the reinvestment of all income and
capital gain distributions.
+ Inflation is represented by the Consumer Price Index (CPI), which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.
[GRAPHIC] 5
<PAGE>
Portfolio Management Discussion and Analysis
For the first six months of 1997, the municipal market was relatively quiet.
Although the market rallied a little in the beginning of the year, prices
declined in March as the economy appeared to be heating up. When the Federal
Reserve Board moved to raise interest rates, prices dropped even further, but in
the second quarter, moderate economic growth led to a rally in bond prices.
Overall, municipals tended to trade within a relatively narrow range over the
first half of the year, without any major incidents or market upsets.
Supply and demand were affected by stock market gains, which drew money away
- -----------------
from the municipal market. Fortunately, a number of issues from the mid-1980s
were called or prerefunded and new issuance was low. Together, these factors
-----------
reduced supply, which helped the market deal with weakening demand.
Liquidity continued to decline, yield spreads tightened, and several
-------------
broker/dealers left the municipal market to pursue higher profit potential
elsewhere. Municipal quality generally increased as the cost of insurance
continued to decline for new issues. With fewer issues offering yield
advantages, individual security selection became increasingly important in
identifying municipal bond opportunities.
Given this context, how did the MainStay Tax Free Bond Fund do during the first
half of 1997?
For the six months ended 6/30/97, the MainStay Tax Free Bond Fund returned 2.92%
and 2.90% for Class A shares and Class B shares, respectively, excluding all
sales charges. Both share classes slightly underperformed the average Lipper*
general municipal debt fund, which returned 2.95% over the reporting period.
What factors were the major contributors to the Fund's performance?
In the first quarter, we believed inflation would remain modest and economic
growth would continue to be favorable. As a result, the Fund had a slightly
longer duration than our competitors when the Federal Reserve Board moved to
--------
raise interest rates, which negatively impacted performance. Although we quickly
retreated to a neutral duration for the Fund and have remained there since, the
Fund suffered a setback that would take much of the second quarter to undo.
How did you seek to provide attractive yields for municipal investors?
Because there has been an increase in insured credits, today about half of the
---------------
municipal issues available are rated AAA or carry insurance that gives them
equivalent characteristics. As a result, it's easy to find quality, but
difficult to find yield. We have reduced the Fund's holdings among AA-rated and
A-rated paper, which we believe offer insufficient yield advantages relative to
the highest-quality securities. Instead, we've looked for opportunities in
BBB-rated paper which we believe offer more attractive yields.
Can you be specific?
In the past, we have found substantial opportunities among BBB-rated hospital
[GRAPHIC]
Supply and demand
- -----------------
In the bond market, supply is influenced by the amount of new securities issued
and the amount of bonds investors wish to sell. Demand reflects the amount of
bonds investors wish to buy, which may decrease when other markets offer greater
opportunities.
Prerefunding
- ------------
Returning principal prior to the initial date at which a bond can be called or
"refunded" (usually 10 years after issuance). In order to prerefund, the issuer
must return the par value of the bond and provide or guarantee interest payments
through the initial call date.
- ----------
* See footnote and table on page 10 for more information on Lipper Analytical
Services, Inc.
6
<PAGE>
YEAR-BY-YEAR & SIX MONTH PERFORMANCE
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period-end Total Return %
- --------------------------------------------------------------------------------
<S> <C>
12/86 6.01%
12/87 0.58%
12/88 8.77%
12/89 7.38%
12/90 4.68%
12/91 10.89%
12/92 8.41%
12/93 10.39%
12/94 -6.02%
12/95 15.00% Class A
12/95 14.86% Class B
12/96 3.63% Class A
12/96 3.33% Class B
6/97 2.92% Class A
6/97 2.90% Class B
</TABLE>
Returns are for Class B shares unless otherwise noted. See footnote * on page 10
for more information on performance.
issues. Over the years, negative press about hospitals and health care issues
has caused these issues to be oversold. As we've found opportunities to buy at
advantageous prices, we have done so, and as yield spreads have narrowed, the
Fund has benefited. Recently, hospital quality and utilization have improved
nationwide, making some of these issues stronger credits. Therefore, the Fund
remains overweighted in BBB-rated hospital issues, and we believe they continue
to offer attractive returns to investors.
If you want higher yields, why not invest in noninvestment-grade securities?
While some of our competitors have invested in high-yield municipal bonds to
improve their returns, the MainStay Tax Free Fund is unable to do so. According
to the prospectus, the Fund may not invest in any securities rated below
"medium-grade." The Fund's BBB-rated bonds have provided competitive returns,
but we don't want to compromise quality for yield. In fact, the overall quality
rating of the Fund is AA-, which we feel is appropriate for the Fund's investors
and our risk-management strategy at this time.
Are there other steps you take to manage risk?
Yes, we seek broad diversification both geographically and in the types of
issues we buy. As a result, the Fund owns everything from water, sewer, and
airport bonds to hospital, dormitory, and toll-road securities. We also seek to
diversify by state, although the Fund is heavily overweighted in states like
California, New York, Illinois, and Texas, where municipal issuance is stronger.
How do you seek to protect yields over time?
Since we're investing for the long-term, we need to watch when the Fund's bonds
can be called--redeemed by the issuer prior to their stated maturity--to provide
the Fund with a measure of call protection and reduce the probability of having
to reinvest at unattractive rates. During the first
[GRAPHIC]
Yield spread
- ------------
The difference in yield between securities in different market sectors, such as
Treasury securities and municipal bonds--or between different securities in a
single sector, such as municipal bonds with different credit ratings.
Duration
- --------
A measure of average maturity, which adjusts for the time value of the payments
investors will receive, and which takes into account interest payments as well
as principal payments. Duration is a better gauge of interest-rate sensitivity
than average maturity alone.
Insured credits
- ---------------
Bonds that carry insurance or other guarantees that interest and principal
payments will be met. Although such insurance may increase the cost of the bond,
it also reduces the risk of default, regardless of the issuer's credit quality.
7
<PAGE>
DIVERSIFICATION BY STATE--TOP 5 AS OF 6/30/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
State Percentage
- --------------------------------------------------------------------------------
<S> <C>
New York 18.8%
California 15.8%
Illinois 7.9%
Texas 7.4%
Michigan 6.7%
All Other 43.4%
</TABLE>
- ----------
Actual percentages will vary over time.
half of the year, we've been continually extending call dates with newer or
longer issues. While many of these transactions are neutral in terms of
performance, the net effect is to help improve call protection for our
investors.
Are there other types of issues you find attractive?
Original issue discount bonds (or "OIDs") are securities that are available at a
discount when they're first offered to the public. When those bonds mature, they
repay at par value, which may offer opportunities for capital appreciation.
---------
Under the Clinton administration, tax advantages have been reduced for certain
original issue discount bonds, so we've been seeking OIDs with better tax
advantages. We believe this strategy has had a positive overall impact on the
Fund.
What else do you look for in municipal bonds?
Whenever we buy a bond, we like to look at its prerefunding potential.
Prerefunding can help boost performance by ensuring that investors receive the
full value of the bond and the full value of interest payments to the call date,
even before it arrives. During the first half of the year the Fund held two New
York bonds that prerefunded, one in the first quarter and one in the second.
Both were positive for the Fund. The Fund also owns Arapahoe, Colorado E-470
Toll Road bonds, which announced plans to prerefund in August. While that
transaction hasn't yet taken place, the bonds have appreciated substantially.
Are there other issues that did well for the Fund?
Yes. We bought some Detroit Sewer bonds at a very attractive price, and we've
seen good performance from Anaheim, California bonds we bought when the market
was low. We also bought a Harrisburg, Pennsylvania pooled-loan bond at an
attractive price in April and sold it near the market's peak. We've also had
good results from some Foothill California Toll Road zero-coupon bonds we'd
purchased last year. And we bought some New York City gen-
[GRAPHIC]
Par value
- --------
The nominal face value of a security. In most cases, a bond selling at par is
worth the same dollar amount it was issued for or, if it was issued at a
discount or premium, the amount at which it will be redeemed at
maturity--usually $1,000 per bond.
8
<PAGE>
eral obligation bonds simply because we knew they'd be scarce.
Why would New York City general obligation bonds be scarce?
While New York City is the nation's largest municipal issuer, it has almost
reached its debt issuance limit. In the future, the city will issue bonds
through the New York City Transitional Finance Authority. But in the meantime,
we saw an opportunity in the city's general obligation bonds and they have
worked well for the Fund.
Were there other pockets of strong performance?
Yes. High-coupon, short-duration bonds did well in the first quarter.
Low-coupon, long-duration bonds performed better in the second quarter.
What were some of your major sales during the first half of the year?
We've held Denver Airport 7 3/4% bonds for some time, but sold them in May when
we received an attractive bid. Although we generally like BBB hospitals, we sold
the Fund's Pottsville, Pennsylvania Hospital bonds because they no longer met
the Fund's risk/reward objectives.
Were there other securities that didn't perform as you had hoped?
Last year, we had been selling off the Fund's 4 3/4% coupon bonds, but retained
a few. We found they underperformed during the first half of the year due to
lack of demand.
What is your outlook going forward?
We're currently maintaining a neutral duration, but revisiting that decision
weekly. We believe that if growth remains moderate and inflation doesn't heat
up, it should be good for bonds. But with low unemployment, wage increases could
trigger inflation, so the future remains uncertain. We'll continue to manage the
Fund seeking a high level of current income free from regular federal income
tax,+ consistent with the preservation of capital.
Ravi Akhoury
James Flood
Portfolio Managers
QUALITY BREAKDOWN AS OF 6/30/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percentage
- --------------------------------------------------------------------------------
<S> <C>
AAA 58.2%
AA 7.7%
A 11.3%
BBB 25.7%
SP-1 0.6%
Cash, Equivalents & Other Assets,
less Liabilities -3.5%
</TABLE>
Actual percentages will vary over time. Bond quality ratings provided by
Standard & Poor's. See the prospectus for details.
[GRAPHIC]
- ----------
+ A small portion of income may be subject to state and local taxes and the
Alternative Minimum Tax. Capital gains, if any, may also be taxed.
9
<PAGE>
Returns & Lipper Rankings as of 6/30/97
<TABLE>
<CAPTION>
Fund average annual total returns*
- --------------------------------------------------------------------------------
Life of Fund
1 year 5 years 10 years through 6/30/97
<S> <C> <C> <C> <C>
Class A 8.01% 5.75% 6.68% 6.37%
Class B 7.81% 5.66% 6.64% 6.33%
- --------------------------------------------------------------------------------
<CAPTION>
Fund SEC returns*
- --------------------------------------------------------------------------------
Life of Fund
1 year 5 years 10 years through 6/30/97
<S> <C> <C> <C> <C>
Class A 3.15% 4.79% 6.19% 5.93%
Class B 2.81% 5.34% 6.64% 6.33%
- --------------------------------------------------------------------------------
<CAPTION>
Fund Lipper+ rankings & Lipper category returns as of 6/30/97
- --------------------------------------------------------------------------------
Life of Fund
1 year 5 years 10 years through 6/30/97
<S> <C> <C> <C> <C>
Class A 93 out of n/a n/a n/a
226 funds
Class B 117 out of 98 out of 64 out of 54 out of
226 funds 107 funds 67 funds 57 funds
Average Lipper
general municipal
debt fund 7.81% 6.51% 7.76% 7.71%
- --------------------------------------------------------------------------------
<CAPTION>
Fund per share net asset values & distributions for the six months ended 6/30/97
- --------------------------------------------------------------------------------
NAV 6/30/97 Income Capital Gains
<S> <C> <C> <C>
Class A $9.87 $0.2520 $0.0000
Class B $9.88 $0.2400 $0.0000
- --------------------------------------------------------------------------------
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested.
Class A shares, first offered to the public on 1/3/95, are sold with a
maximum initial sales charge of 4.5% and an annual 12b-1 fee of .25%.
Performance figures for this class include the historical performance of
the Class B shares for periods from inception (5/1/86) up to 12/31/94.
Performance data for the two classes after this date vary based on
differences in their expense structures. Class B shares of the Fund are
sold with no initial sales charge, but are subject to a maximum CDSC of up
to 5% if shares are redeemed during the first 6 years of purchase and an
annual 12b-1 fee of up to .50%.
+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales
charges. Lipper averages listed above are not class specific. Life of Fund
return is from the period of the Class B shares' initial offering through
6/30/97. The Fund's Class A shares were first offered to the public on
1/3/95; Class B shares on 5/1/86.
[GRAPHIC]
10
<PAGE>
Top 10 Holdings as of 6/30/97
<TABLE>
<CAPTION>
HOLDING AMOUNT
- ----------------------------------------------------------------------------------------
<S> <C>
Massachusetts State Health & Education Facilities Authority Revenue,
Harvard University, Series P, 5.375%, due 11/1/32 $22,278,025
Arapahoe County (Colorado) Capital Improvement
Trust Fund Highway Revenue, 7.00%, due 8/31/26 17,915,625
Michigan State Hospital Finance Authority Revenue,
Genesys Health Systems, Series A, 7.50%, due 10/1/27 16,818,637
Georgia Municipal Electric Authority Power Revenue, Series A
8.00%, due 1/1/15 15,299,854
Los Angeles County (California) Metropolitan Transportation Authority
Sales Tax Revenue, Series A, 5.00%, due 7/1/25 14,457,000
Texas Water Resources Finance Authority Revenue,
7.625%, due 8/15/08 12,638,438
Louisiana Public Facilities Authority, Hospital Revenue,
Pendleton Memorial Methodist, 6.75%, due 6/1/22 11,875,500
Oakland California Revenue, Series A, 7.60%, due 8/1/21 11,078,340
New York City Municipal Water Finance Authority, Water & Sewer
Systems Revenue, Series B, 5.50%, due 6/15/27 10,794,750
Illinois Development Finance Authority, Pollution Control Revenue,
Illinois Power Co., Series A, 8.30%, due 4/1/17 10,493,300
- ----------------------------------------------------------------------------------------
</TABLE>
[GRAPHIC]
- ----------
This breakdown is provided for informational purposes only. The Fund's holdings
may change daily. A shareholder owns shares of the Fund but does not own a
direct interest in any of the specific securities listed. Short-term securities
are excluded. See Portfolio of Investments for specific type of security held.
11
<PAGE>
MainStay Tax Free Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
=============================
LONG-TERM MUNICIPAL BONDS (100.6%)+
<S> <C> <C>
ALABAMA (1.7%)
Birmingham Alabama Airport
Authority Revenue, Series A
7.375%, due 7/1/10 (a) ................... $ 3,600,000 $ 3,883,500
Mobile Alabama
General Obligation
5.00%, due 2/15/16 ....................... 5,000,000 4,718,750
-----------
8,602,250
-----------
ALASKA (0.8%)
Alaska State Housing
Finance Corp., Series A
6.00%, due 12/1/36 ....................... 4,000,000 4,040,000
-----------
CALIFORNIA (15.8%)
Anaheim Public Financing
Authority, Lease Revenue
Project C
(zero coupon), due 9/1/17 ................ 2,000,000 635,000
(zero coupon), due 9/1/18 ................ 5,130,000 1,526,175
Series A
5.00%, due 3/1/37 ........................ 2,000,000 1,792,500
California Housing Finance Agency
Revenue, Home Mortgage
Series E
6.10%, due 8/1/29 (a) .................... 3,525,000 3,595,500
East Bay Municipal Utilities
District Water System Revenue
5.00%, due 6/1/26 ........................ 6,000,000 5,482,500
Eden Township Hospital
District Revenue
7.40%, due 11/1/19 ....................... 5,300,000 5,618,000
Foothill-Eastern Transportation
Corridor Agency, Toll Road
Revenue, Series A
(zero coupon), due 1/1/24 ................ 6,255,000 1,227,544
(zero coupon), due 1/1/27 ................ 56,105,000 8,976,800
(zero coupon), due 1/1/28 ................ 23,540,000 3,560,425
Los Angeles County
Metropolitan Transportation
Authority, Sales Tax Revenue
Series A
5.00%, due 7/1/25 ........................ 15,800,000 14,457,000
Los Angeles County Public
Works Financing Authority
Lease Revenue
Project V-B
5.125%, due 12/1/29 ...................... 2,100,000 1,939,875
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
<TABLE>
<CAPTION>
Principal
Amount Value
=============================
CALIFORNIA (Continued)
<S> <C> <C>
Metropolitan Water District of
Southern California Waterworks
Revenue, Series C
5.00%, due 7/1/37 ........................ $ 5,200,000 $ 4,660,500
Northern California Power Agency
Public Power Revenue
Hydroelectric Project 1
7.15%, due 7/1/24 ........................ 7,100,000 7,387,053
Oakland California Revenue, Series A
7.60%, due 8/1/21 ........................ 10,500,000 11,078,340
Riverside California Hospital Revenue
Riverside Community Hospital
Series A
6.75%, due 11/1/15 ....................... 1,000,000 1,023,630
San Diego California Public Facilities
Financing Authority, Sewer Revenue
5.00%, due 5/15/25 ....................... 5,000,000 4,575,000
-----------
77,535,842
-----------
COLORADO (3.6%)
Arapahoe County Capital Improvement
Trust Fund Highway Revenue
7.00%, due 8/31/26 ....................... 15,750,000 17,915,625
-----------
DISTRICT OF COLUMBIA (1.3%)
District of Columbia Revenue
Georgetown University
Series A
7.40%, due 4/1/18 ........................ 3,380,000 3,582,800
Series A-MBIA-IBC
7.40%, due 4/1/18 ........................ 2,815,000 3,012,050
-----------
6,594,850
-----------
FLORIDA (4.4%)
Dade County Seaport Revenue
5.125%, due 10/1/21 ...................... 3,000,000 2,853,750
Dade County
Special Obligation, Series B
5.00%, due 10/1/35 ....................... 6,110,000 5,560,100
Florida State Board of Education
Capital Outlay
Series A
5.00%, due 6/1/24 ........................ 4,740,000 4,325,250
Orange County Housing Finance
Authority GNMA, Single
Family Mortgage Revenue
Series B
5.875%, due 3/1/28 (a) ................... 1,750,000 1,750,000
Tampa Florida Sports
Authority Revenue
5.25%, due 1/1/27 ........................ 7,415,000 7,044,250
-----------
21,533,350
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE>
Portfolio of Investments June 30, 1997 (unaudited) continued
<TABLE>
<CAPTION>
Principal
Amount Value
=============================
LONG-TERM MUNICIPAL BONDS (Continued)
<S> <C> <C>
GEORGIA (3.1%)
Georgia Municipal Electric Authority
Power Revenue, Series A
8.00%, due 1/1/15 ........................ $14,745,000 $15,299,854
-----------
ILLINOIS (7.9%)
Chicago Illinois Gas Supply Revenue
Peoples Gas, Light & Coke Co.
Series A
8.10%, due 5/1/20 (a) .................... 2,000,000 2,195,000
Illinois Development Finance
Authority, Pollution Control
Revenue, Illinois Power Co.
Series A
8.30%, due 4/1/17 ........................ 10,000,000 10,493,300
Illinois Health Facilities Authority
Revenue
Glenoaks Hospital, Series E
9.50%, due 11/15/19 ...................... 890,000 1,037,962
Hinsdale Hospital, Series B
9.00%, due 11/15/15 ...................... 1,870,000 2,152,838
Series C
9.50%, due 11/15/19 ...................... 5,675,000 6,618,469
Methodist Medical Center
8.00%, due 10/1/14 ....................... 1,000,000 1,006,420
Proctor Community Hospital Project
7.375%, due 1/1/23 ....................... 3,700,000 3,838,750
Sherman Hospital Project
6.75%, due 8/1/21 ........................ 2,675,000 2,875,625
Illinois Regional Transportation
Authority, Series C
7.10%, due 6/1/25 ........................ 1,500,000 1,693,125
Kankakee Illinois Sewer Revenue
7.00%, due 5/1/16 ........................ 2,000,000 2,197,500
Metropolitan Pier & Exposition
Authority, Illinois Dedicated
State Tax Revenue, Series A
(zero coupon), due 6/15/25 ............... 12,125,000 2,425,000
Southwestern Illinois Development
Authority, Medical Facilities
Revenue, Anderson Hospital
Project, Series A
7.00%, due 8/15/12 ....................... 2,000,000 2,102,500
-----------
38,636,489
-----------
INDIANA (0.6%)
Indiana Health Facility Financing
Authority, Hospital Revenue
Jackson County Schneck
Memorial Hospital
7.50%, due 2/15/12 ....................... 2,600,000 2,785,250
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
=============================
<S> <C> <C>
LOUISIANA (3.4%)
Louisiana Public Facilities
Authority, Hospital Revenue
Pendleton Memorial Methodist
6.75%, due 6/1/22 ........................ $11,600,000 $11,875,500
Louisiana State Offshore Terminal
Authority, Deepwater Port Revenue
Series E
7.60%, due 9/1/10 ........................ 4,480,000 4,888,800
-----------
16,764,300
-----------
MASSACHUSETTS (6.6%)
Massachusetts State Health &
Educational Facilities Authority
Revenue
Harvard University, Series P
5.375%, due 11/1/32 ...................... 22,820,000 22,278,025
Medical Center of Central
Massachusetts
7.10%, due 7/1/21 ........................ 2,500,000 2,731,250
University Hospital, Series C
7.25%, due 7/1/19 ........................ 2,500,000 2,721,875
Massachusetts State Water
Resource Authority, Series B
5.00%, due 12/1/25 ....................... 5,000,000 4,600,000
-----------
32,331,150
-----------
MICHIGAN (6.6%)
Detroit Michigan Sewer Disposal
Revenue, Series A
5.00%, due 7/1/25 ........................ 5,000,000 4,537,500
5.00%, due 7/1/27 ........................ 5,000,000 4,531,250
Michigan Municipal Board
Authority Revenue
5.125%, due 10/1/20 ...................... 2,000,000 1,877,500
Michigan State Hospital Finance
Authority Revenue
Genesys Health Systems, Series A
7.50%, due 10/1/27 ....................... 15,255,000 16,818,637
Pontiac Osteopathic Hospital
Series A
6.00%, due 2/1/24 ........................ 5,000,000 4,937,500
-----------
32,702,387
-----------
MINNESOTA (0.6%)
Minneapolis & Saint Paul Minnesota
Metropolitan Airport Commission
Series 7
7.80%, due 1/1/13 (a) .................... 2,750,000 2,921,875
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
MainStay Tax Free Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
=============================
LONG-TERM MUNICIPAL BONDS (Continued)
<S> <C> <C>
MISSISSIPPI (1.2%)
Mississippi State General Obligation
Series C
4.75%, due 12/1/15 ....................... $ 6,355,000 $ 5,838,656
-----------
NEBRASKA (0.5%)
Nebraska Higher Education
Loan Program, Series A-6
6.45%, due 6/1/18 (a) .................... 500,000 517,500
Nebraska Investment Finance
Authority, Single Family
Housing Revenue, Series C
6.30%, due 9/1/28 (a) .................... 2,000,000 2,065,000
-----------
2,582,500
-----------
NEVADA (1.4%)
Clark County Airport Improvement
Revenue
8.125%, due 7/1/18 (a) ................... 6,500,000 6,866,665
-----------
NEW HAMPSHIRE (1.9%)
New Hampshire Higher Educational &
Health Facilities Authority Revenue
Dartmouth College
5.70%, due 6/1/27 ........................ 9,400,000 9,470,500
-----------
NEW JERSEY (0.7%)
New Jersey Health Care Facilities
Financing Authority Revenue
Zurbrugg Memorial Hospital
Series C
8.50%, due 7/1/12 ........................ 3,165,000 3,275,902
-----------
NEW YORK (18.8%)
Battery Park City Authority
Revenue, Series A
5.50%, due 11/1/26 ....................... 100,000 97,125
Metropolitan Transportation
Authority, Service Contract
Commuter Facilities Revenue
Series 7
(zero coupon), due 7/1/14 ................ 3,930,000 1,478,662
Series 5
7.00%, due 7/1/12 ........................ 2,265,000 2,440,537
Series L
7.50%, due 7/1/17 ........................ 4,475,000 4,704,120
Transportation Facilities Revenue
Series L
7.50%, due 7/1/17 ........................ 5,950,000 6,254,640
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
=============================
NEW YORK (Continued)
<S> <C> <C>
Metropolitan Transportation
Authority, New York Dedicated
Tax Fund, Series A
5.25%, due 4/1/26 ........................ $ 5,750,000 $ 5,455,312
Municipal Assistance Corp.
New York City, Series 67
7.625%, due 7/1/08 ....................... 3,660,000 3,961,950
Nassau County General Obligation
Series T
5.20%, due 9/1/15 ........................ 600,000 586,500
New York City Educational
Construction Fund Revenue
5.50%, due 4/1/26 ........................ 3,000,000 2,958,750
New York City General Obligation
Series E
6.00%, due 8/1/26 ........................ 1,450,000 1,462,688
Series G
6.00%, due 10/15/26 ...................... 7,000,000 7,061,250
Series B
7.00%, due 6/1/15 ........................ 1,745,000 1,834,431
Series C
7.20%, due 8/15/15 ....................... 1,065,000 1,147,537
Series A
7.75%, due 8/15/07 ....................... 120,000 133,350
7.75%, due 8/15/15 ....................... 180,000 199,575
7.75%, due 8/15/16 ....................... 125,000 138,594
Series D
8.00%, due 8/1/04 ........................ 710,000 795,200
Series F
8.20%, due 11/15/04 ...................... 755,000 855,981
New York City Housing Authority
Multifamily Revenue, Series A
5.65%, due 7/1/10 ........................ 1,250,000 1,253,125
New York City Municipal Water
Finance Authority, Water & Sewer
Systems Revenue, Series B
5.50%, due 6/15/27 ....................... 11,100,000 10,794,750
5.75%, due 6/15/29 ....................... 5,100,000 5,087,250
New York City Trust
Cultural Resouces Revenue
New York Botanical Garden
5.80%, due 7/1/26 ........................ 50,000 50,563
New York State Dormitory Authority
Revenue
Cornell University, Series A
7.375%, due 7/1/30 ....................... 2,880,000 3,132,000
Park Ridge Housing Income Project
7.85%, due 2/1/29 ........................ 1,400,000 1,487,500
Rochester Institute of Technology
5.25%, due 7/1/22 ........................ 3,000,000 2,872,500
Siena College
5.75%, due 7/1/26 ........................ 2,000,000 2,017,500
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Portfolio of Investments (unaudited) continued
<TABLE>
<CAPTION>
Principal
Amount Value
=============================
LONG-TERM MUNICIPAL BONDS (Continued)
<S> <C> <C>
NEW YORK (Continued)
New York State Dormitory Authority
Revenue (continued)
State University Education Facilities
Series B
7.50%, due 5/15/11 ....................... $ 4,250,000 $ 5,036,250
New York State Energy Research &
Development Authority
Gas Facilities Revenue
Brooklyn Union Gas Co., Project
5.50%, due 1/1/21 ........................ 600,000 590,250
New York State Environmental
Facilities Corp. Pollution Control
Revenue, State Water
Series A
4.65%, due 6/15/07 ....................... 1,400,000 1,370,250
7.50%, due 6/15/12 ....................... 3,050,000 3,358,813
New York State Local Government
Assistance Corp.
(zero coupon), due 4/1/14 ................ 1,130,000 454,825
New York State Medical Care Facilities
Finance Agency Revenue
7.80%, due 2/15/19 ....................... 595,000 634,419
7.875%, due 8/15/20 ...................... 890,000 985,563
Hospital & Nursing Home
Series A
8.00%, due 2/15/28 ....................... 3,000,000 3,172,500
St. Francis Hospital of Roslyn
Project A
7.625%, due 11/1/21 ...................... 3,875,000 4,117,187
New York State Thruway Authority
Highway & Bridge Trust Fund
Series B
5.125%, due 4/1/15 ....................... 2,800,000 2,688,000
New York State Urban Development
Corp., Revenue
5.50%, due 7/1/22 ........................ 100,000 96,375
Niagara Falls New York Bridge
Commission Toll Revenue
Series B
5.25%, due 10/1/15 ....................... 500,000 491,875
Port Authority of New York &
New Jersey Consolidated Bonds
Series 109
5.375%, due 1/15/32 ...................... 1,250,000 1,200,000
-----------
92,457,697
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
=============================
<S> <C> <C>
OHIO (0.5%)
Ohio State Air Quality Development
Authority Revenue, Pollution
Control, Cleveland County Project
8.00%, due 12/1/13 ....................... $ 2,000,000 $ 2,320,000
-----------
OKLAHOMA (0.4%)
Tulsa Oklahoma Industrial
Authority Revenue
University of Tulsa, Series A
5.00%, due 10/1/22 ....................... 2,000,000 1,827,500
-----------
PENNSYLVANIA (5.1%)
Allegheny County Airport Revenue
Greater Pittsburgh International
Airport, Series C
8.25%, due 1/1/16 (a) .................... 4,800,000 4,986,192
Allegheny County, Pennsylvania
Hospital Development Authority
Revenue, Saint Margaret Memorial
Hospital, Project A
9.80%, due 7/1/10 ........................ 1,500,000 1,500,000
Delaware County Pennsylvania
Industrial Development
Authority, Series A
6.20%, due 7/1/19 ........................ 5,000,000 5,100,000
Emmaus Pennsylvania General
Authority Revenue, Series E
7.90%, due 5/15/18 ....................... 6,450,000 6,828,938
Horizon Hospital System Authority
Pennsylvania Hospital Revenue
6.35%, due 5/15/16 ....................... 1,665,000 1,683,731
6.35%, due 5/15/26 ....................... 3,650,000 3,677,375
Pennsylvania Housing Finance
Agency, Single Family Mortgage
Series 58A
5.95%, due 10/1/28 (a) ................... 250,000 250,625
Scranton-Lackawanna Health &
Welfare Authority Revenue
Moses Taylor Hospital Project
6.20%, due 7/1/17 ........................ 1,000,000 991,250
-----------
25,018,111
-----------
PUERTO RICO (2.7%)
Puerto Rico Commonwealth
General Obligation
5.375%, due 7/1/25 ....................... 10,000,000 9,612,500
5.40%, due 7/1/25 ........................ 3,775,000 3,704,219
-----------
13,316,719
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
MainStay Tax Free Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
=============================
LONG-TERM MUNICIPAL BONDS (Continued)
<S> <C> <C>
TEXAS (7.4%)
Arlington Texas Independent
School District
4.75%, due 2/15/22 ....................... $ 7,335,000 $ 6,546,487
Brazos River Authority Revenue
Houston Lighting &
Power Co. Project
Series C
8.10%, due 5/1/19 ........................ 2,050,000 2,152,234
Series A
8.25%, due 5/1/19 ........................ 2,500,000 2,620,325
Matagorda County Navigation
District 1, Pollution Control
Revenue
Central Power & Light Co. Project
7.50%, due 12/15/14 ...................... 3,150,000 3,433,500
Houston Lighting & Power Co.
Series E
7.20%, due 12/1/18 ....................... 3,470,000 3,734,587
Nueces River Authority Texas
Water Supply Facilities
Corpus Christi Lake Project
5.50%, due 3/1/27 ........................ 2,500,000 2,456,250
Tarrant County Junior College
District
4.625%, due 2/15/15 ...................... 3,000,000 2,722,500
Texas Water Resources Finance
Authority Revenue
7.625%, due 8/15/08 ...................... 11,895,000 12,638,438
-----------
36,304,321
-----------
UTAH (2.8%)
Intermountain Power Agency of Utah
Power Supply Revenue
Series A
5.00%, due 7/1/21 ........................ 1,400,000 1,242,500
Series B
7.20%, due 7/1/19 ........................ 3,475,000 3,544,500
Series D
8.625%, due 7/1/21 ....................... 6,530,000 6,660,600
Utah County Hospital Revenue
ICH Health Services Inc.
5.25%, due 8/15/26 ....................... 2,500,000 2,321,875
-----------
13,769,475
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
=============================
<S> <C> <C>
VIRGINIA (0.1%)
Norfolk Virginia Industrial
Development Authority, Lease
Revenue Norfolk Public Health
Center Project
5.625%, due 9/15/17 ...................... $ 500,000 $ 500,625
-----------
WEST VIRGINIA (0.7%)
West Virginia State Building
Commission Lease Revenue, West
Virginia Regional Jail & Correction
Series A
7.00%, due 7/1/15 ........................ 3,000,000 3,243,750
-----------
Total Long Term Municipal Bonds
(Cost $489,035,892) ...................... 494,455,643
-----------
SHORT-TERM INVESTMENTS (2.9%)
FLORIDA (0.7%)
Jacksonville Florida Pollution Control
Revenue, Florida Power & Light
Company Project
5.35%, due 5/1/29 (b) .................... 3,235,000 3,235,000
-----------
IDAHO (0.7%)
Idaho State Tax Antic Notes
4.625%, due 6/30/98 ...................... 3,300,000 3,324,519
-----------
MICHIGAN (0.1%)
Michigan State Strategic Fund
Limited Obligation Revenue
Dow Chemical Company Project
5.50%, due 2/1/09 (b) .................... 400,000 400,000
-----------
NEW YORK (0.1%)
New York City General Obligation
Series A-4
4.00%, due 8/1/21 (b) .................... 500,000 500,000
New York City Municipal Water
Finance Authority, Water & Sewer
Systems Revenue
3.80%, due 6/15/22 (b) ................... 100,000 100,000
-----------
600,000
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE>
Portfolio of Investments (unaudited) continued
<TABLE>
<CAPTION>
Principal
Amount Value
=============================
SHORT-TERM INVESTMENTS (Continued)
<S> <C> <C>
TEXAS (1.3%)
Gulf Coast Waste Disposal Authority
Texas Pollution Control Revenue
Amoco Oil Company Project
3.40%, due 10/1/17 (b) ................... $ 6,600,000 $ 6,600,000
-------------
Total Short-Term Investments
(Cost $14,158,595) ....................... 14,159,519
-------------
Total Investments
(Cost $503,194,487) (c) .................. 103.5% 508,615,162(d)
Liabilities in Excess of Cash
and Other Assets ......................... (3.5) (17,430,983)
----------- -------------
Net Assets ................................. 100.0% $ 491,184,179
=========== =============
</TABLE>
- ----------
(a) Interest on these securities is subject to alternative minimum tax.
(b) Variable rate security that may be tendered back to the issuer at any time
prior to maturity at par.
(c) The cost stated also represents the aggregate cost for Federal income tax
purposes.
(d) At June 30, 1997, net unrealized appreciation was $5,420,675, based on cost
for Federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $11,411,535 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $5,990,860.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE>
Statement of Assets and Liabilities as of June 30, 1997 (unaudited)
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $503,194,487) ................................................. $ 508,615,162
Cash .............................................................................................................. 78,356
Receivables:
Investment securities sold ...................................................................................... 10,231,584
Interest ........................................................................................................ 9,183,739
Fund shares sold ................................................................................................ 669,232
------------
Total assets ................................................................................................... 528,778,073
------------
LIABILITIES:
Payables:
Investment securities purchased ................................................................................. 34,793,890
NYLIFE Distributors ............................................................................................. 309,145
Fund shares redeemed ............................................................................................ 223,187
Adviser ......................................................................................................... 121,875
Transfer agent .................................................................................................. 39,211
Trustees ........................................................................................................ 3,555
Custodian ....................................................................................................... 2,919
Accrued expenses .................................................................................................. 108,759
Dividend payable .................................................................................................. 1,991,353
------------
Total liabilities .............................................................................................. 37,593,894
------------
Net assets ........................................................................................................ $ 491,184,179
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized:
Class A ......................................................................................................... $ 12,604
Class B ......................................................................................................... 484,608
Additional paid-in capital ........................................................................................ 499,929,847
Accumulated undistributed net investment income ................................................................... 603,867
Accumulated net realized loss on investments ...................................................................... (15,267,422)
Net unrealized appreciation on investments ........................................................................ 5,420,675
-------------
Net assets ........................................................................................................ $491,184,179
=============
CLASS A
Net assets applicable to outstanding shares ....................................................................... $ 12,440,814
=============
Shares of beneficial interest outstanding ......................................................................... 1,260,446
=============
Net asset value per share outstanding ............................................................................. $ 9.87
Maximum sales charge (4.50% of offering price) .................................................................... 0.47
-------------
Maximum offering price per share outstanding ...................................................................... $ 10.34
=============
CLASS B
Net assets applicable to outstanding shares ....................................................................... $478,743,365
=============
Shares of beneficial interest outstanding ......................................................................... 48,460,846
=============
Net asset value and offering price per share outstanding .......................................................... $ 9.88
=============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
<PAGE>
Statement of Operations for the six months ended June 30, 1997 (unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Interest ...................................................... $ 15,665,434
------------
Expenses:
Administration ................................................ 737,145
Advisory ...................................................... 737,145
Service ....................................................... 614,287
Distribution--Class B ......................................... 483,411
Transfer agent ................................................ 201,101
Shareholder communication ..................................... 52,140
Recordkeeping ................................................. 38,077
Custodian ..................................................... 24,049
Registration .................................................. 18,500
Professional .................................................. 27,732
Trustees ...................................................... 6,870
Miscellaneous ................................................. 13,805
------------
Total expenses ............................................... 2,954,262
------------
Net investment income ........................................... 12,711,172
------------
REALIZED AND UNREALIZED GAIN (LOSS)ON INVESTMENTS:
Net realized gain (loss) from:
Security transactions ......................................... 1,280,781
Futures transactions .......................................... (755,748)
------------
Net realized gain on investments ................................ 525,033
------------
Net change in unrealized appreciation on investments:
Security transactions ......................................... 727,394
Futures transactions .......................................... (48,937)
------------
Net unrealized gain on investments .............................. 678,457
------------
Net realized and unrealized gain on investments ................. 1,203,490
------------
Net increase in net assets resulting from operations ............ $ 13,914,662
============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six months
ended Year ended
June 30, December 31,
1997* 1996
============= =============
<S> <C> <C>
DECREASE IN NET ASSETS:
Operations:
Net investment income .................................................................. $ 12,711,172 $ 27,351,209
Net realized gain on investments ....................................................... 525,033 2,467,919
Net change in unrealized appreciation (depreciation) on investments .................... 678,457 (13,331,152)
------------- -------------
Net increase in net assets resulting from operations ................................... 13,914,662 16,487,976
------------- -------------
Dividends to shareholders:
From net investment income:
Class A ............................................................................... (329,693) (738,853)
Class B ............................................................................... (11,777,367) (26,567,311)
------------- -------------
Total dividends to shareholders ..................................................... (12,107,060) (27,306,164)
------------- -------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ............................................................................... 2,188,130 10,869,272
Class B ............................................................................... 17,437,980 41,870,887
Net asset value of shares issued to shareholders in reinvestment of dividends:
Class A ............................................................................... 204,884 551,381
Class B ............................................................................... 6,162,599 16,676,585
------------- -------------
25,993,593 69,968,125
Cost of shares redeemed:
Class A ............................................................................... (6,508,373) (4,558,162)
Class B ............................................................................... (42,825,545) (94,941,242)
------------- -------------
Decrease in net assets derived from capital share transactions ...................... (23,340,325) (29,531,279)
------------- -------------
Net decrease in net assets .......................................................... (21,532,723) (40,349,467)
NET ASSETS:
Beginning of period ...................................................................... 512,716,902 553,066,369
------------- -------------
End of period ............................................................................ $ 491,184,179 $ 512,716,902
============= =============
Accumulated undistributed net investment income (excess distribution) .................... $ 603,867 $ (245)
============= =============
</TABLE>
- ----------
* Unaudited.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A Class B Class A Class B Class A Class B
======= ======= ======= ======= ======= =======
Six months ended Year ended Year ended
June 30, 1997* December 31, 1996 December 31, 1995
========================= ======================== ========================
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period .... $ 9.84 $ 9.84 $ 10.02 $ 10.03 $ 9.20 $ 9.20
---------- ----------- ---------- ----------- --------- -----------
Net investment income .... 0.26 0.25 0.54 0.51 0.52 0.51
Net realized and
unrealized gain (loss)
on investments ......... 0.02 0.03 (0.19) (0.19) 0.83 0.83
---------- ----------- ---------- ----------- --------- -----------
Total from investment
operations ............. 0.28 0.28 0.35 0.32 1.35 1.34
---------- ----------- ---------- ----------- --------- -----------
Less dividends and
distributions:
From net investment
income ................. (0.25) (0.24) (0.53) (0.51) (0.53) (0.51)
From net realized gain
on investments ......... -- -- -- -- -- --
---------- ----------- ---------- ----------- --------- -----------
Total dividends and
distributions .......... (0.25) (0.24) (0.53) (0.51) (0.53) (0.51)
---------- ----------- ---------- ----------- --------- -----------
Net asset value at end
of period .............. $ 9.87 $ 9.88 $ 9.84 $ 9.84 $10.02 $10.03
========== =========== ========== =========== ========= ===========
Total investment return(a) 2.92% 2.90% 3.63% 3.33% 15.00% 14.86%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income .............. 5.37%+ 5.17%+ 5.4% 5.2% 5.5% 5.2%
Expenses .............. 1.01%+ 1.21%+ 1.0% 1.2% 1.0% 1.2%
Portfolio turnover rate .. 58% 58% 95% 95% 110% 110%
Net assets at end of
period (in 000's) ...... $12,441 $478,743 $16,486 $496,231 $9,752 $543,314
<CAPTION>
Class B
============================================================
September 1
through Year ended August 31
December 31 =====================================
1994** 1994 1993 1992
====== ==== ==== ====
<S> <C> <C> <C> <C>
Net asset value at
beginning of period .... $ 9.71 $ 10.39 $ 10.21 $ 9.82
----------- ----------- ----------- -----------
Net investment income .... 0.17 0.51 0.57 0.59
Net realized and
unrealized gain (loss)
on investments ......... (0.51) (0.58) 0.47 0.40
----------- ----------- ----------- -----------
Total from investment
operations ............. (0.34) (0.07) 1.04 0.99
----------- ----------- ----------- -----------
Less dividends and
distributions:
From net investment
income ................. (0.17) (0.53) (0.60) (0.60)
From net realized gain
on investments ......... -- (0.08) (0.26) --
----------- ----------- ----------- -----------
Total dividends and
distributions .......... (0.17) (0.61) (0.86) (0.60)
----------- ----------- ----------- -----------
Net asset value at end
of period .............. $ 9.20 $ 9.71 $ 10.39 $ 10.21
=========== =========== =========== ===========
Total investment return(a) (3.53%) (0.69%) 10.81% 10.42%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income .............. 5.6%+ 5.4% 5.6% 5.9%
Expenses .............. 1.2%+ 1.2% 1.2% 1.3%
Portfolio turnover rate .. 37% 92% 138% 97%
Net assets at end of
period (in 000's) ...... $513,781 $552,156 $476,761 $292,936
</TABLE>
- ----------
* Unaudited.
** The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is not
annualized.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
<PAGE>
MainStay Tax Free Bond Fund
Note 1--Organization and Business:
The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business
Trust. The Trust is registered under the Investment Company Act of 1940, as
amended, (the "Act") as an open-end management investment company and is
comprised of fourteen funds. These financial statements and notes relate only to
MainStay Tax Free Bond Fund (the "Fund").
The Fund currently offers two classes of shares. Class A shares, whose
distribution commenced on January 3, 1995, are offered at net asset value per
share plus an initial sales charge. Class B shares are offered without an
initial sales charge, although a declining contingent deferred sales charge may
be imposed on redemptions made within six years of purchase. Class A shares and
Class B shares bear the same voting (except for issues that relate solely to one
class), dividend, liquidation and other rights and conditions except that the
Class B shares are subject to higher distribution fee rates. Each class of
shares bears distribution and/or service fee payments under a distribution plan
pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The Fund's investment objective is to provide a high level of current income
free from regular Federal income tax, consistent with preservation of capital.
Note 2--Significant Accounting Policies:
The following is a summary of significant accounting policies followed by the
Fund:
Valuation of Fund Shares. The net asset value per share of each class of shares
is calculated on each day the New York Stock Exchange (the "Exchange") is open
for trading as of the close of regular trading on the Exchange. The net asset
value per share of each class of shares is determined by taking the assets
attributable to a class of shares, subtracting the liabilities attributable to
that class, and dividing the result by the outstanding shares of that class.
Securities Valuation. Portfolio securities of the Fund are stated at value
determined (a) by appraising debt securities at prices supplied by a pricing
agent selected by the Adviser, whose prices reflect broker/dealer supplied
valuations and electronic data processing techniques if those prices are deemed
by the Adviser to be representative of market values at the regular close of
business of the New York Stock Exchange, (b) by appraising options and futures
contracts at the last sale price on the market where such options or futures are
principally traded, and (c) by appraising all other securities and other assets,
including debt securities for which prices are supplied by a pricing agent but
are not deemed by the Adviser to be representative of market values, but
excluding money market instruments with a remaining maturity of sixty days or
less and including restricted securities and securities for which no market
quotations are available, at fair value in accordance with procedures approved
by the Trustees. Short-term securities which mature in more than 60 days are
valued at current market quotations. Short-term securities which mature in 60
days or less are valued at amortized cost if their term to maturity at purchase
was 60 days or less, or by amortizing the difference between market
22
<PAGE>
Notes to Financial Statements (unaudited)
value on the 61st day prior to maturity and value on maturity date if their
original term to maturity at purchase exceeded 60 days.
Events affecting the values of certain portfolio securities that occur between
the close of trading on the principal market for such securities and the regular
close of the New York Stock Exchange will not be reflected in the Fund's
calculation of net asset value unless the Adviser believes that the particular
event would materially affect net asset value, in which case an adjustment would
be made.
Futures Contracts. A futures contract is an agreement to purchase or sell a
specified quantity of an underlying instrument at a specified future date, or to
make or receive a cash payment based on the value of a securities index. During
the period the futures contract is open, changes in the value of the contract
are recognized as unrealized gains or losses by "marking to market" such
contract on a daily basis to reflect the market value of the contract at the end
of each day's trading. The Fund agrees to receive from or pay to the broker an
amount of cash equal to the daily fluctuation in the value of the contract. Such
receipts or payments are known as "variation margin". When the futures contract
is closed, the Fund records a realized gain or loss equal to the difference
between the proceeds from (or cost of) the closing transaction and the Fund's
basis in the contract. The Fund has entered into contracts for the future
delivery of debt securities in order to attempt to protect against the effects
of adverse changes in interest rates or to lengthen or shorten the average
maturity or duration of the Fund's portfolio.
The use of futures contracts involves, to varying degrees, elements of market
risk. Risks arise from the possible imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets, and
the possible inability of counterparties to meet the terms of their contracts.
However, the Fund's activities in futures contracts are conducted through
regulated exchanges which minimize counterparty credit risks.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income or excise tax provision is
required.
Dividends and Distributions to Shareholders. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
monthly. Income dividends and capital gain distributions are determined in
accordance with Federal income tax regulations which may differ from generally
accepted accounting principles.
Security Transactions and Investment Income. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Interest income is
accrued daily except when collection is not expected. Premiums on securities
purchased by the Fund are amortized on the constant yield method over the life
of the respective securities or, if applicable, over the period to the first
call date. Discounts are accreted when required by Federal tax regulations.
23
<PAGE>
MainStay Tax Free Bond Fund
Expenses. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when allocations of direct expenses can otherwise fairly be
made. The investment income and expenses (other than expenses incurred under the
Distribution Plan) and realized and unrealized gains and losses on investments
of the Fund are allocated to separate classes of shares based upon their
relative net asset value on the date the income is earned or expenses and
realized and unrealized gains and losses are incurred.
Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
Note 3--Fees and Related Party Policies:
Investment Advisory and Administration Fees. MacKay-Shields Financial
Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an
Investment Advisory Agreement. MacKay-Shields is a registered investment adviser
and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New
York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect
wholly-owned subsidiary of New York Life, is the Administrator for the Fund.
The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an annual
rate of 0.30% of the average daily net assets of the Fund.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"). The
Fund, with respect to each class of shares, has adopted a Distribution Plan (the
"Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Class A Plan, the Distributor receives payments from the Fund at
an annual rate of 0.25% of the average daily net assets of the Fund's Class A
shares, which is an expense of the Class A shares of the Fund for distribution
or service activities as designated by the Distributor. Pursuant to the Class B
Plan, the Fund's Class B shares are subject to the payment of a monthly
distribution fee, which is an expense of the Class B shares of the Fund, at the
annual rate of 0.25% of the lesser of:
(a) the aggregate gross sales of the Fund's Class B shares since the inception
of the Fund (not including reinvestment of dividends or capital gains
distributions), less the aggregate net asset value of the Fund's Class B shares
exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or upon which such charge has been
waived; or (b) the average daily net assets of the Fund's Class B shares.
The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund. Service fee as shown on the statement of
operations represents the fees for both Class A shares and Class B shares.
24
<PAGE>
Notes to Financial Statements (unaudited) continued
The Plan provides that the distribution fee is payable to NYLIFE Distributors
regardless of the amounts actually expended by NYLIFE Distributors for
distribution of the Fund's shares and service activities.
NYLIFE Distributors anticipates that its actual distribution expenditures will
substantially exceed the distribution fee received by it during the initial
years of the operation of the Plan and that in later years its expenditures may
be less than the distribution fee.
Sales Charges. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $4,636 for the six
months ended June 30, 1997. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges on redemptions of Class B shares of
$289,561 for the six months ended June 30, 1997.
Trustees Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee
of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus
reimbursement for travel and out-of-pocket expenses. The Trust allocates this
expense in proportion to the net assets of the respective Funds.
Other. NYLIFE Distributors has received $16,906 for providing the Fund certain
transfer agency services for the period January 1, 1997, through April 30, 1997.
Effective May 1, 1997, MainStay Shareholder Services Inc. ("MSS"), an indirect
wholly owned subsidiary of New York Life Insurance Company, was appointed
Transfer, Dividend Disbursing and Shareholder Servicing Agent. MSS was paid
$3,815 for services rendered May 1, 1997, through June 30, 1997.
Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $8,855 for the six months ended
June 30, 1997.
Fees for recordkeeping services provided to the Trust by NYLIFE Distributors are
charged to the Fund. The fee for the six months ended June 30, 1997, amounted to
$38,077.
Note 4--Federal Income Tax:
At December 31, 1996, for Federal income tax purposes, capital loss
carryforwards of $15,743,517 were available to the extent provided by
regulations to offset future realized gains through 2003. To the extent that
these loss carryforwards are used to offset future capital gains, it is probable
that the capital gains so offset will not be distributed to shareholders. The
Fund utilized $2,516,857 of capital loss carryforward during the prior fiscal
year.
25
<PAGE>
MainStay Tax Free Bond Fund
Note 5--Purchases and Sales of Securities (in 000's):
During the six months ended June 30, 1997, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $282,855 and $290,092,
respectively.
Note 6--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1997* December 31, 1996
================ =================
Class A Class B Class A Class B
======= ======= ======= =======
<S> <C> <C> <C> <C>
Shares sold .............................. 224 1,782 1,114 4,283
Shares issued in reinvestment of dividends 21 632 56 1,707
------ ------ ------ ------
245 2,414 1,170 5,990
Shares redeemed .......................... (661) (4,374) (467) (9,724)
------ ------ ------ ------
Net increase (decrease) .................. (416) (1,960) 703 (3,734)
====== ====== ====== ======
</TABLE>
- ----------
* Unaudited.
26
<PAGE>
This page intentionally left blank
27
<PAGE>
The MainStay Funds
<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund graph indicating of companies in expanding markets and are willing to accept a higher
risk/reward of with strong growth potential level of risk for higher return potential
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in a portfolio that tracks You seek a conservative way to partici-
Equity Index Fund graph indicating the makeup and returns of the pate in the growth potential of stocks+
risk/reward of S&P 500*
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Offers broad diversification into You prefer the higher return potential
International Equity Fund graph indicating international stock markets with of international equities or want to
risk/reward of an emphasis on risk control add diversification to your domestic
Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Convertible Fund [Horizontal bar Invests in convertible securities for You want income from securities that
As of 6/2/97, this Fund graph indicating a special blend of long-term growth may offer growth potential if converted
was closed to new risk/reward of potential and dividend income into common stock
investors. Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Balances current income with growth You seek a combination of income and
Total Return Fund graph indicating opportunities by investing in stocks, growth potential and want to manage
risk/reward of bonds, and money market instruments risk through diversification
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks undervalued stocks with You seek to maximize total return from
Value Fund graph indicating attractive dividends and a stimulus securities which may have more poten-
risk/reward of for positive change tial than the market currently sees
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's.
+ The original investment is guaranteed provided it is held for 10 years with
all dividend and capital gain distributions reinvested. If shares are
redeemed prior to or after the one-day guarantee date, the investor loses
the benefit of the guarantee with respect to those shares.
++ Investments in foreign securities may be subject to greater risks than
domestic investments. These risks include currency fluctuations, changes in
U.S. or foreign tax or currency laws, and changes in monetary policies and
economic and political conditions in foreign countries.
(S) While individual securities owned by the Government Fund may be guaranteed
by the U.S. government and its agencies, the share price of the Fund is not
guaranteed and will fluctuate with market conditions.
|| Certain of the Fund's investments may be speculative.
# Investments in the Money Market Fund are neither insured nor guaranteed by
the U.S. government and there is no assurance that the Fund will be able to
maintain a stable net asset value of $1.00 per share; investment returns
will vary with market conditions.
** A small portion of the Fund's income may be subject to state and local
taxes and the Alternative Minimum Tax. Capital gains, if any, may also be
taxed.
28
<PAGE>
<TABLE>
<CAPTION>
INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Seeks a high level of current income You are seeking to combine high
Government Fund graph indicating consistent with safety of principal current income and safety of principal
risk/reward of primarily from U.S. government
Fund] securities(S)
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar An aggressive high-yield bond You want to maximize current income
High Yield graph indicating fund that is actively managed for and can accept the higher risk of
Corporate Bond Fund risk/reward of maximum current income|| securities with high yield potential
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current yields and You prefer the higher return potential
International Bond Fund graph indicating competitive total return from non- of international bonds or want to
risk/reward of U.S. bonds with an emphasis on add diversification to your domestic
Fund] risk control investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating stability of principal, and liquidity, competitive yields on cash you're plan-
risk/reward of with free checkwriting# ning to spend or invest in the near future
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks current income and competi- You seek to combine the return potential
Strategic Income Fund graph indicating tive overall return by investing in of high-grade, high-yield,|| and inter-
risk/reward of a diversified portfolio of domestic national bonds and want to manage risk
Fund] and foreign debt securities++ through multimarket diversification
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-FREE INCOME FUNDS
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Seeks high current income exempt You are a California resident and want to
California Tax Free Fund graph indicating from both federal and California keep more of what you earn by invest-
risk/reward of income taxes consistent with ing for income that's double tax free**
Fund] preservation of capital**
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are a New York State or City resident
New York Tax Free Fund graph indicating from federal, New York State, and and want to keep more of what you earn
risk/reward of New York City income taxes consis- with income that's double or triple tax
Fund] tent with preservation of capital** free**
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are in a high federal income tax
TAX FREE BOND FUND graph indicating from regular federal income tax con- bracket or want to pay less of your
risk/reward of sistent with preservation of investment income to the IRS
Fund] capital**
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A word about risk and reward
The "thermometers" in the tables above show how much risk the investor must
assume and the related return potential. Generally speaking, investments with
higher return potential also carry higher risks. So, the longer the indicator
bar, the higher the risk and reward potential of the Fund.
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send any money. Shares
must be offered in the investor's state of residence.
29
<PAGE>
- --------------------------------------------------------------------------------
MAINSTAY
Tax Free Bond Fund
- --------------------------------------------------------------------------------
[GRAPHIC]
Semiannual Report
June 30, 1997
Unaudited
[LOGO] MAINSTAY(R)
FUNDS
OFFICERS & TRUSTEES
Alice T. Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
[LOGO] MAINSTAY(R)
NYLIFE Distributors Inc.
Morris Corporate Center, Building A
300 Interpace Parkway
Parsippany, New Jersey 07054
Administrator & Distributor of The MainStay Funds
http://www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly owned subsidiary of
New York Life Insurance Company.
[LOGO] NEW YORK LIFE
This report is provided for the information of shareholders of the MainStay Tax
Free Bond Fund. It may be given to others only when preceded or accompanied by
an effective MainStay Funds prospectus. This report does not offer to sell any
securities or solicit orders to buy them.
(C)1997. All rights reserved. MSSA14-08/97
[GRAPHIC]
<PAGE>
Table of Contents
Chairperson's Letter 2
MainStay Total Return Fund Highlights 4
$10,000 Invested in the MainStay Total
Return Fund versus S&P 500 and
Inflation--Class A & Class B Shares 5
Portfolio Management Discussion and Analysis 6
Year-by-Year & Six-Month Performance 7
Diversification by Industry--Top 5 8
Portfolio Composition 10
Returns & Lipper Rankings 11
Top 10 Equity Holdings 12
Top 10 Bond Holdings 12
10 Largest Purchases 13
10 Largest Sales 13
Portfolio of Investments 14
Unaudited Financial Statements 19
Notes to Financial Statements 23
The MainStay Funds 28
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
Chairperson's Letter
After a remarkable six-year period of expansion, the U.S. economy continued to
grow throughout the first half of 1997. For most investors, the overall impact
was positive, but there were some rough seas along the way.
As the stock market made gains early in the year, concerns about the possibility
of impending inflation brought increased price volatility. In late March, the
Federal Reserve Board moved to raise interest rates in an effort to slow
economic growth. Although this preemptive strike helped keep inflation in check,
the initial reaction from both the stock and bond markets was negative. As a
result, bond prices faltered and stocks tumbled more than 9% from their peak
before both markets began to stabilize.
As employment figures, earnings estimates, and other indicators began to suggest
that economic growth was slowing in the second quarter, the stock market not
only recovered lost ground, but soared to record highs. With higher valuations,
however, the market became increasingly volatile, reacting severely to any news
that could signal a shift in buying patterns or interest rates.
Positive performance, emerging concerns
Despite the volatility, domestic stock and bond markets closed the first half of
1997 with positive returns. While Malaysia and Singapore had negative results,
most international markets performed well. Given these results, many investors
are once again celebrating their good fortune. The underlying volatility,
however, should serve to remind us that the level of growth we've enjoyed for
more than six years is not typical market behavior.
Certainly no one can predict what will happen next, so it's important to keep
recent performance in perspective. We believe that having realistic
expectations, as well as a long-range plan and diversified investments can help
you work toward achieving your goals, wherever the markets may move.
Solid team approach
At MainStay(R), we believe our risk-averse approach can help provide reassurance
to many investors, particularly in uncertain times. Each MainStay Fund is
managed by a team of experienced professionals who employ disciplined investment
strategies to seek competitive returns with careful attention to downside risk.
Our team approach offers investors a combination of experience, insight, and
market perspective that few individuals could provide on their own. It also
helps provide important checks and balances in security selection, market
evaluation, and overall accountability.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
Our Fund managers believe that strong companies tend to get stronger in up
markets and perform better than average when the markets go down. Using
selection criteria appropriate to the individual Funds they manage, they may
look for specific catalysts that are likely to stimulate growth, enhance value,
or increase yield without taking on unnecessary risk.
Looking forward
As we move into the second half of 1997, we expect that an intensified focus on
inflation, interest rates, and corporate earnings will account for much of the
momentum driving the market. Regardless of how events unfold, you can be
confident that we will hold true to our disciplined management approach.
At MainStay, we believe that having a close relationship with your Registered
Representative is one of the best ways to keep your long-term focus in any
market environment. Therefore, we urge you to speak with your Registered
Representative regularly--whether the market happens to be up or down--so he or
she can understand your needs and help keep you on a steady course.
While we've seen positive results for the first half of the year, we remain
somewhat cautious. Whatever the future brings, we'll continue to provide the
information, service, and support you can consider when making decisions--and
the prudent management you depend on to pursue your long-range goals.
Sincerely,
/s/ Alice T. Kane
Alice T. Kane
July 1997
- --------------------------------------------------------------------------------
3
<PAGE>
MainStay Total Return Fund Highlights
MARKET HIGHLIGHTS
FOR THE 6 MONTHS ENDED 6/30/97
- --------------------------------------------------------------------------------
o After a sharp downturn in late March and early April, the stock market
soared to record highs.
o Low inflation, low interest rates, and moderate economic growth in the
second quarter provided a solid backdrop for growth investors.
o Although the Federal Reserve Board moved to raise interest rates in late
March, the bond markets were relatively quiet over the first half of 1997.
o With low volatility, the market's attention moved from Treasuries to other
ways of enhancing yield including corporate bonds, mortgage-backed
securities, and others.
- --------------------------------------------------------------------------------
FUND HIGHLIGHTS FOR THE
6- AND 12-MONTH PERIODS ENDED 6/30/97
- --------------------------------------------------------------------------------
o One-year total returns of 17.79% and 17.25% for Class A shares and Class B
shares, respectively, excluding all sales charges, as of 6/30/97.
o Financial, pharmaceutical, and health care related stocks contributed
positively to equity performance.
o Overweighting corporate bonds and investing in BBB-rated Yankee bonds
helped enhance yield in the income portion of the Fund's investment
portfolio.
o Both share classes underperformed the average Lipper* balanced fund for the
first half of 1997.
- --------------------------------------------------------------------------------
- ----------
* See footnote + and table on page 11 for more information on Lipper
Analytical Services, Inc.
4
<PAGE>
$10,000 Invested in the MainStay
Total Return Fund versus
S&P 500 and Inflation
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Total
Period-end Return Fund S&P 500* Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
12/28/87 $ 9,497.25 $10,761.00 $10,017.00
12/88 $10,223.40 $12,543.00 $10,459.00
12/89 $11,756.10 $16,509.00 $10,944.00
12/90 $12,350.80 $15,997.00 $11,628.00
12/91 $16,900.50 $20,861.00 $11,975.00
12/92 $17,512.20 $22,448.00 $12,329.00
12/93 $19,350.50 $24,702.00 $12,667.00
12/94 $18,884.50 $25,028.00 $12,996.00
12/95 $24,297.40 $34,423.00 $13,334.00
12/96 $27,510.10 $39,327.00 $13,752.00
6/97 $30,143.00 $47,436.00 $13,847.00
</TABLE>
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Total
Period-end Return Fund S&P 500* Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
12/28/87 $10,050.00 $10,761.00 $10,017.00
12/88 $10,818.40 $12,543.00 $10,459.00
12/89 $12,440.30 $16,509.00 $10,944.00
12/90 $13,069.60 $15,997.00 $11,628.00
12/91 $17,884.10 $20,861.00 $11,975.00
12/92 $18,531.40 $22,448.00 $12,329.00
12/93 $20,476.70 $24,702.00 $12,667.00
12/94 $19,983.60 $25,028.00 $12,996.00
12/95 $25,571.40 $34,423.00 $13,334.00
12/96 $28,827.60 $39,327.00 $13,752.00
6/97 $31,499.00 $47,436.00 $13,847.00
</TABLE>
- ----------
The Class A graph assumes an initial investment of $10,000 made on 12/28/87
reflecting the effect of the 5.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,450 and includes the historical
performance of the Class B shares for periods from inception (12/28/87)
through 12/31/94. The Class B graph assumes an initial investment of
$10,000 made on 12/28/87. Returns shown do not reflect the Contingent
Deferred Sales Charge (CDSC), as it would not apply for the period shown.
All results include reinvestment of distributions at net asset value and
the change in share price for the stated period. Past performance is no
guarantee of future results.
* "Standard & Poor's 500 Composite Stock Price Index" and "S&P 500" are
registered trademarks of Standard & Poor's. The S&P 500 is an unmanaged
index and is considered to be generally representative of the U.S. stock
market. Results assume the reinvestment of all income and capital gain
distributions.
+ Inflation is represented by the Consumer Price Index (CPI), which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.
[GRAPHIC]
5
<PAGE>
Portfolio Management Discussion and Analysis
During the first half of 1997, the equity markets were highly volatile, with
daily gains or losses of 100 points or more becoming common fare. Over the same
period, however, the bond markets were relatively tame. The Federal Reserve
Board's move to raise interest rates in late March caused stocks to undergo a
sharp downturn, or correction, of nearly 10%.
----------
In the second quarter, economic growth slowed to more moderate levels, inflation
fears calmed, and interest rates remained low. This environment provided an
ideal backdrop for growth investors, as stocks rose to record levels. Advances
were led by large-capitalization issues, with the S&P 500* gaining much more in
--------------
six months than it normally would in an entire year since 1926.+ Of course,
investors should bear in mind that past performance is no guarantee of future
results.
While bond prices dropped slightly following the 25 basis point increase in the
-----------
Federal Funds rate, by the end of June, the markets had fully recovered. With
low volatility and relatively stable interest rates, opportunities among
Treasury securities and along the yield curve were scarce. As a result,
-----------
investors turned their attention to a variety of other income securities in an
effort to enhance yields. Corporate and utility bonds showed strong performance
and mortgage-related and asset-backed issues provided attractive opportunities.
Given this context, how did the MainStay Total Return Fund do in the first six
months of 1997?
For the six months ended 6/30/97, the MainStay Total Return Fund returned 9.57%
and 9.27% for Class A shares and Class B shares, respectively, excluding all
sales charges. Both share classes underperformed the average Lipper++ balanced
fund, which returned 10.21% for the first half of 1997.
What was the principal reason for the Fund's underperformance of its peers?
Our focus on mid-capitalization growth stocks had a particularly negative impact
in a period when large-capitalization income-producing stocks tended to
outperform.
In the equity portion of the Fund, what made the biggest contribution to
performance?
Sticking to our management disciplines led us to believe the Fund's investments
would be positive over the long term. Most of the equity underperformance in the
first quarter was due to five or six issues that contributed positively to
performance in the second quarter. The Fund's overweighted position in financial
------------
stocks took a substantial toll in the first quarter, but paid off in the second
when financial issues rallied. First USA was one security that did partic-
[GRAPHIC]
Correction
- ----------
A shift in security prices that brings them more in line with historic averages.
Capitalization
- --------------
The amount of outstanding equity a company has issued. Companies may vary
greatly in the amount of equity capital they have raised, and their
capitalization may change with new issues or stock repurchases.
Basis point
- -----------
One hundredth of one percent in the yield of an investment, i.e., 100 basis
points equals 1%.
Yield curve
- -----------
When interest rates available from various short-, intermediate-, and long-term
securities are plotted on a graph, the resulting line is known as a yield curve.
- ----------
* See page 5 for more information on the S&P 500 Index.
+ Source: Ibbotson Associates, Chicago. Used with permission. All rights
reserved. Average annual total return for 1926-1996 was 10.7%. Past
performance is no guarantee of future results.
++ See footnote and table on page 11 for more information on Lipper Analytical
Services, Inc.
6
<PAGE>
YEAR-BY-YEAR & SIX-MONTH PERFORMANCE
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period-end Total Return
%
- -------------------------------------------
<S> <C>
12/87 0.50
12/88 7.65
12/89 14.99
12/90 5.06
12/91 36.84
12/92 3.62
12/93 10.50
12/94 -2.41
12/95 28.66 Class A
12/95 27.96 Class B
12/96 13.22 Class A
12/96 12.73 Class B
6/97 9.57 Class A
6/97 9.27 Class B
</TABLE>
- ----------
Returns are for Class B shares unless otherwise noted. See footnote * on page 11
for more information on performance.
ularly well. It received a takeover bid from Banc One in the first quarter, and
we've sold some of the stock at a profit. We also bought Washington Mutual, a
financial name that provided positive performance over the first half of the
year.
How did technology stocks do over the first half of the year?
Despite a major downturn in March and April, the Fund's technology investments
have generally done well. Computer Associates International was the Fund's best
performer in the second quarter, and Microsoft also contributed positively to
performance over the first half of 1997. 3Com suffered a major setback when
Intel entered its market and was the Fund's worst performer over the reporting
period, but we believe investors have overestimated the competitive threat and
we still continue to hold 3Com. We purchased Compuware, a mid-sized software
company in the middle of the first quarter and it has contributed positively to
the Fund's performance.
What other companies made positive contributions over the first half of the
year?
Many of the Fund's health care related issues performed well. The Fund's
holdings included Guidant, a manufacturer of devices for cardiac surgery, and
Schering-Plough, a major pharmaceutical company. Both returned over 40%(S) for
the Fund. Medtronic, whose business is similar to Guidant's, also did well.
Travelers Group stock increased 39%, with its subsidiary, Smith Barney,
benefiting from rising values in the brokerage industry. Lucent Technologies, a
well diversified telecommunications company, gained 52% during the first half of
1997 and was a significant holding.
[GRAPHIC]
Weighting
- ---------
The proportion of a portfolio allocated to a specific security or sector, i.e.,
a fund is said to be overweighted in a sector when that portion of the portfolio
is greater than the sector's general relationship to the market as a whole.
- ----------
(S) Returns reflect performance during the period securities were held in the
Fund.
7
<PAGE>
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 6/30/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Industry Percentage
- ----------------------------------------------------
<S> <C>
U.S.Government & Federal Agencies 17.3%
Finance 9.1%
Drugs 6.6%
Retail 6.3%
Technology 6.0%
All Other 54.7%
</TABLE>
- ----------
Actual percentages will vary over time.
Aside from 3Com, which stocks didn't do well?
IKON Office Solutions had trouble integrating new acquisitions, which affected
performance. And Seagate Technology faced tighter competition and reduced demand
for hard disks, which led to negative returns.
One of the Fund's largest holdings, Green Tree Financial, suffered from rumors
about competition from Fannie Mae and news stories about the chief executive's
compensation. HFS, another major holding, performed poorly when investors had
difficulty evaluating its acquisition of CUC International. Both HFS and CUC
International are highly profitable and control vast streams of income, so we're
confident that the value will eventually be realized. Even so, these
difficulties had a negative impact on the Fund's overall performance.
What happened in the bond portion of the Fund?
In this uneventful market, we maintained a relatively neutral duration for the
--------
Fund but took a number of steps seeking to increase yield throughout the
reporting period. Recognizing that Treasury securities offered few
opportunities, we overweighted the Fund in corporate bonds, which added value
and capital gain potential as yield spreads narrowed. We also sold some of the
Fund's Treasury holdings to buy mortgage-backed and asset-backed securities,
--------------- -----------------------
including unleveraged collateralized mortgage obligations (CMOs). All of these
securities helped contribute positively to performance over the first half of
the year.
Were there other bonds that did well?
Yes. The Fund was invested in some lower-quality investment-grade financial
[GRAPHIC]
Duration
- --------
A measure of average maturity, which adjusts for the time value of the payments
investors will receive and which takes into account interest payments as well as
principal payments. Duration is a better gauge of interest-rate sensitivity than
average maturity alone.
Mortgage-backed
securities
- ---------------
Securities representing interests in "pools" of mortgages in which principal and
interest payments by the holders of underlying fixed- or adjustable-rate
mortgages are, in effect, "passed through" to investors (net of fees paid to the
issuer or guarantor of the securities).
Asset-backed
securities
- ------------
Bonds or notes backed by loan paper or an anticipated income stream from the
sale of merchandise or services. The bonds are generally originated by banks,
credit card companies, or other providers of credit and often "enhanced" by a
bank letter of credit or by insurance from an institution other than the issuer.
8
<PAGE>
issues that provided higher yields. The Fund also benefited from low-balance
mortgage loans, which yield about a half a percent more than traditional
mortgages. The Fund also did well with putable bonds and Yankee bonds.
What are putable bonds?
They're securities investors can give back to the issuer at their discretion on
a specified date. These bonds may benefit from volatility characteristics that
differ from the market as a whole. While the puts won't come into play for a few
months, the Fund has already captured about a quarter of the unrealized gains we
----------------
think these securities offer.
What about Yankee bonds?
They're bonds issued in the United States by foreign banks and corporations,
usually when conditions in the U.S. are more favorable than in other markets,
including the issuer's domestic market overseas. Since the bonds are denominated
in U.S. dollars, they carry no currency risk. We believe one advantage we have
in the Yankee market is our strong research capability, which helps us sort good
names from the bad. We found some attractive opportunities among lower-rated
investment-grade Yankee bonds for the Fund, which have helped performance in the
first half of 1997.
What's the overall quality of the income portion of the Fund?
The Fund has maintained AA quality, even with its investments in some
lower-quality bonds. While we can invest a portion of the Fund's assets in
BB-rated securities, we seek to minimize exposure to noninvestment-grade bonds.
Did you have any bonds that didn't do well?
The Fund's seasoned mortgage pools performed roughly in line with Treasuries,
which tended to underperform other segments of the market, but we believe we may
see values realized in seasoned mortgages in the months ahead. A significant
decision during the first half of the year was moving the Fund out of Treasuries
and into higher-performing sectors in the bond market. One area we didn't
participate in was utility bonds, which had very positive results. While we may
have missed an opportunity there, we believe that with deregulation, many of
these bonds may be poised for downgrades.
What's your outlook for the future?
We believe that if economic growth continues at a moderate pace and inflation
stays near its current level, it will be good for stocks and moderate for bonds.
The rising disparity between stock valuations
[GRAPHIC]
Unrealized gains/losses
- -----------------------
Gains or losses in the price of a security that has not yet been sold. Such
gains or losses may become realized when the security in which there is a gain
or loss is actually sold.
9
<PAGE>
and corporate earnings, however, may pose a challenge for equity investors in
the future. If wages rise faster than corporate earnings, inflation could heat
up, which could force rates higher and bond prices lower. With these
possibilities in mind, we remain cautiously optimistic. Whatever the future
brings, we'll continue to seek current income consistent with reasonable
opportunity for future growth of capital and income.
Ravi Akhoury
Rudy Carryl
Edmund Spelman
Portfolio Managers
PORTFOLIO COMPOSITION AS OF 6/30/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percentage
- ----------------------------------------------------
<S> <C>
Common Stocks 63.0%
Bonds 33.8%
Cash, Equivalents, & Other Assets,
less Liabilities 3.2%
</TABLE>
- ----------
Actual percentages will vary over time.
[GRAPHIC]
10
<PAGE>
Returns & Lipper Rankings as of 6/30/97
<TABLE>
<CAPTION>
Fund average annual total returns*
- --------------------------------------------------------------------------------
1 year 5 years Life of Fund through 6/30/97
<S> <C> <C> <C>
Class A 17.79% 13.95% 12.97%
Class B 17.25% 13.66% 12.82%
- --------------------------------------------------------------------------------
<CAPTION>
Fund SEC returns*
- --------------------------------------------------------------------------------
1 year 5 years Life of Fund through 6/30/97
<S> <C> <C> <C>
Class A 11.31% 12.67% 12.30%
Class B 12.25% 13.42% 12.82%
- --------------------------------------------------------------------------------
<CAPTION>
Fund Lipper+ rankings & Lipper category returns as of 6/30/97
- --------------------------------------------------------------------------------
1 year 5 years Life of Fund through 6/30/97
<S> <C> <C> <C>
Class A 205 out of n/a n/a
303 funds
Class B 220 out of 31 out of 23 out of
303 funds 87 funds 46 funds
Average Lipper
balanced fund 19.41% 12.94% 12.71%
- --------------------------------------------------------------------------------
<CAPTION>
Fund per share net asset value & distributions for the six months ended 6/30/97
- --------------------------------------------------------------------------------
NAV 6/30/97 Income Capital Gains
<S> <C> <C> <C>
Class A $21.81 $0.1901 $0.0000
Class B $21.81 $0.1433 $0.0000
- --------------------------------------------------------------------------------
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested.
Class A shares, first offered to the public on 1/3/95, are sold with a
maximum initial sales charge of 5.5% and an annual 12b-1 fee of .25%.
Performance figures for this class include the historical performance of
the Class B shares for periods from inception (12/28/87) up to 12/31/94.
Performance data for the two classes after this date vary based on
differences in their expense structures. Class B shares of the Fund are
sold with no initial sales charge, but are subject to a maximum CDSC of up
to 5% if shares are redeemed during the first 6 years of purchase and an
annual 12b-1 fee of up to 1%.
+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales
charges. Lipper averages listed above are not class specific. Life of Fund
return is from the period of the Class B shares' initial offering through
6/30/97. The Fund's Class A shares were first offered to the public on
1/3/95; Class B shares on 12/28/87.
[GRAPHIC]
11
<PAGE>
Top 10 Equity Holdings as of 6/30/97
<TABLE>
<CAPTION>
HOLDING AMOUNT
- --------------------------------------------------------------------------------
<S> <C>
Travelers Group Inc. $21,861,562
Computer Associates International, Inc. 20,284,172
Medtronic, Inc. 19,845,000
Intel Corp. 19,612,669
SunAmerica Inc. 19,548,750
Tyco International Ltd. 19,498,369
HFS Inc. 19,087,800
American International Group, Inc. 18,074,375
Green Tree Financial Corp. 17,955,000
Lilly (Eli) & Co. 17,271,375
- --------------------------------------------------------------------------------
Top 10 Bond Holdings as of 6/30/97
<CAPTION>
HOLDING AMOUNT
- --------------------------------------------------------------------------------
<S> <C>
Federal National Mortgage Association (Mortgage Pass-Through
Security) 7.50%, due 7/14/27 TBA $35,732,614
United States Treasury Bond 6.625%, due 2/15/27 27,455,026
United States Treasury Note 6.25%, due 2/28/02 25,624,915
Government National Mortgage Association I (Mortgage Pass-
Through Security) 7.00%, due 12/15/23 16,842,529
Green Tree Recreational, Equipment & Consumer Trust Series 1997-B
Class A1 6.55%, due 7/15/28 12,874,673
Government National Mortgage Association I (Mortgage Pass-
Through Security) 6.50%, due 12/15/23 11,919,882
United States Treasury Bond 12.00%, due 8/15/13 9,515,782
United States Treasury Note 5.625%, due 11/30/00 9,178,196
United States Treasury Note 7.75%, due 11/30/99 8,847,882
Government National Mortgage Association II (Mortgage Pass-
Through Security) 6.875%, due 10/20/22 ARM 7,788,982
- --------------------------------------------------------------------------------
</TABLE>
[GRAPHIC]
- ----------
This breakdown is provided for informational purposes only. The Fund's holdings
may change daily. A shareholder owns shares of the Fund but does not own a
direct interest in any of the specific securities listed. Short-term securities
are excluded. See Portfolio of Investments for specific type of security held.
12
<PAGE>
10 Largest Purchases for the six months ended 6/30/97
<TABLE>
<CAPTION>
SECURITY AMOUNT OF PURCHASE
- -----------------------------------------------------------------------------------------
<S> <C>
United States Treasury Notes, due 2/15/98 - 5/15/06 $204,443,795
Federal National Mortgage Association, due 12/1/01-7/14/27 161,531,380
United States Treasury Bonds, due 8/15/13 - 2/15/27 93,492,106
Government National Mortgage Association I and II, due 12/15/17 - 7/25/27 69,200,922
Residential Accredit Loans, Inc. and Residential Asset Securitization
Trust, due 6/25/26 - 7/25/27 22,513,946
Green Tree Financial Corp. and Green Tree Recreational, Equipment
& Consumer Trust, due 10/15/18 - 2/15/29 17,151,394
Lilly (Eli) & Co. 14,505,190
Cardinal Health, Inc. 14,236,213
Merck & Co., Inc. 13,662,723
Washington Mutual Inc. 10,398,013
- -----------------------------------------------------------------------------------------
10 Largest Sales for the six months ended 6/30/97
<CAPTION>
SECURITY AMOUNT OF SALE
- -----------------------------------------------------------------------------------------
<S> <C>
Federal National Mortgage Association, due 12/1/01 - 8/1/26 $196,757,839
United States Treasury Notes, due 2/15/98 - 5/15/06 164,588,871
United States Treasury Bonds, due 8/15/13 - 2/15/27 77,801,410
Government National Mortgage Association I and II, due 12/15/17 - 5/15/27 53,294,777
First USA, Inc. 19,560,286
Wells Fargo & Co. 13,543,942
Green Tree Financial Corp. and Green Tree Recreational, Equipment
& Consumer Trust, due 10/15/18 - 2/15/29 12,792,939
Republic of Columbia, due 2/15/03 - 2/15/27 12,344,419
Merrill Lynch & Co., Inc., due 1/15/99 - 11/21/28 10,847,227
Tidewater Inc. 9,382,971
- -----------------------------------------------------------------------------------------
</TABLE>
[GRAPHIC]
- ----------
This breakdown is provided for informational purposes only. The Fund's holdings
may change daily. All purchases and sales are aggregated by issuer. A
shareholder owns shares of the Fund but does not own a direct interest in any of
the specific securities listed. Short-term securities are excluded. See
Portfolio of Investments for specific type of security held.
13
<PAGE>
MainStay Total Return Fund
<TABLE>
<CAPTION>
Principal
Amount Value
========================================
LONG-TERM BONDS (33.8%)+
<S> <C> <C>
ASSET-BACKED SECURITIES (4.1%)
AIRPLANE LEASES (0.6%)
Aircraft Lease Portfolio
Securitization Ltd.
Series 1996-1 Class CX
7.038%, due 6/15/06
(call date 7/15/02) (f) ........ $ 4,537,499 $ 4,537,499
Airplanes Pass-Through Trust
Series 1 Class C
8.15%, due 3/15/19
(call date 3/15/01) ............ 2,365,000 2,462,012
---------------
6,999,511
---------------
AUTO LOANS (0.2%)
Advanta Automobile
Receivables Trust
Series 1997-1 Class A2
6.75%, due 12/15/03 ............ 2,925,000 2,938,718
---------------
CONSUMER LOANS (1.1%)
Green Tree Recreational, Equipment
& Consumer Trust
Series 1997-B Class A1
6.55%, due 7/15/28 ............. 12,905,000 12,874,673
---------------
CREDIT CARD RECEIVABLES (0.7%)
Banc One Credit Card Master Trust
Series 1995-A Class A
6.15%, due 7/15/02 ............. 4,525,000 4,486,628
Standard Credit Card Master Trust
Series 1995-4 Class A
5.913%, due 2/15/00 (f) ........ 3,630,000 3,630,581
---------------
8,117,209
---------------
EQUIPMENT LOANS (0.7%)
Case Equipment Loan Trust
Series 1995-B Class A3
6.15%, due 9/15/02 ............. 3,605,286 3,612,172
Newcourt Receivables Asset Trust
Series 1996-3 Class A
6.24%, due 12/20/04 ............ 2,451,581 2,444,104
Series 1996-2 Class A
6.87%, due 6/20/04 ............. 2,758,543 2,774,487
---------------
8,830,763
---------------
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
<TABLE>
<CAPTION>
Principal
Amount Value
========================================
MANUFACTURED HOUSING LOANS (0.8%)
<S> <C> <C>
Green Tree Financial Corp.
Series 1997-4 Class A7
7.36%, due 2/15/29 ............. $ 3,960,000 $ 3,920,400
Mid-State Trust VI
Class A-4
7.79%, due 7/1/35 .............. 6,155,000 6,204,055
---------------
10,124,455
---------------
Total Asset-Backed Securities
(Cost $49,780,857) ............. 49,885,329
---------------
BRADY BOND (0.5%)
EURO BOND (0.5%)
Poland-Global Registered
Series RSTA
3.25%, due 10/27/24
(call date 10/27/97) (f) ....... 9,265,000 5,883,275
---------------
Total Brady Bond
(Cost $5,282,398) .............. 5,883,275
---------------
CORPORATE BONDS (3.9%)
AIRLINES (0.6%)
American Airlines
Pass-Through Trusts
Series 1994-A4
9.78%, due 11/26/11 ............ 4,855,000 5,907,612
Series 1991-A2
10.18%, due 1/2/13
(call date 7/2/07) ............. 1,055,000 1,202,890
---------------
7,110,502
---------------
BANKS (1.3%)
Capital One Bank
Medium-Term Senior
Bank Notes
7.15%, due 9/15/06
(put date 9/15/99) ............. 5,650,000 5,711,867
First Empire Capital
Trust I Guaranteed
8.234%, due 2/1/27
(call date 2/1/07) ............. 15,000 15,060
Regions Financial Corp.
7.75%, due 9/15/24
(put date 7/15/04) ............. 5,520,000 5,867,484
Sakura Capital Funding
Cayman Ltd. Guaranteed
Medium-Term Notes
6.763%, due 8/29/49
(call date 2/27/02) (d)(f) ..... 1,950,000 1,950,000
Southtrust Bank
Birmingham, Alabama N A
Medium-Term Notes
7.69%, due 5/15/25
(put date 5/15/05) ............. 2,750,000 2,904,880
---------------
16,449,291
---------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Portfolio of Investments June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
Principal
Amount Value
========================================
CORPORATE BONDS (Continued)
<S> <C> <C>
BROKERAGE (0.2%)
Lehman Brothers Holdings Inc.
7.375%, due 5/15/07
(put date 5/15/00) ............. $ 2,545,000 $ 2,608,778
---------------
DRUGS (0.1%)
Merck & Co., Inc.
Medium-Term Notes Series B
5.76%, due 5/3/37
(put date 5/3/99) .............. 835,000 843,008
---------------
FINANCE (0.9%)
Aetna Services Inc. Guaranteed
6.97%, due 8/15/36
(put date 8/15/04) ............. 2,925,000 2,944,217
American General Institutional
Capital Guaranteed
Series B
8.125%, due 3/15/46 (d) ........ 2,075,000 2,089,193
Travelers Property
& Casualty Corp.
6.75%, due 9/1/99 .............. 3,000,000 3,021,720
TTB Finance Cayman Ltd. Guaranteed
Series REGS
6.763%, due 3/18/07
(call date 3/18/02) (f) ........ 3,000,000 3,000,000
---------------
11,055,130
---------------
FOOD (0.1%)
RJR Nabisco, Inc.
8.50%, due 7/1/07 .............. 820,000 816,515
---------------
MEDIA (0.4%)
Tele Communications Inc.
9.25%, due 4/15/02 ............. 4,250,000 4,571,683
---------------
RETAIL (0.3%)
Dayton Hudson Co.
5.895%, due 6/15/37
(put date 6/15/99) ............. 3,800,000 3,794,680
Sears Roebuck Acceptance Corp.
6.95%, due 5/15/02 ............. 580,000 584,205
---------------
4,378,885
---------------
Total Corporate Bonds
(Cost $47,533,176) ............. 47,833,792
---------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
========================================
MORTGAGE-BACKED SECURITIES (5.2%)
<S> <C> <C>
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) (1.4%)
Asset Securitization Corp.
Series 1996-MD6 Class A1B
6.88%, due 11/13/26 (e) ........ $ 6,650,000 $ 6,656,783
Series 1997-MD7 Class A1B
7.41%, due 1/13/30 (e) ......... 3,885,000 3,989,429
Series 1997-D4 Class A1D
7.49%, due 4/14/29 (e) ......... 6,200,000 6,397,160
---------------
17,043,372
---------------
RESIDENTIAL MORTGAGE LOANS (3.8%)
Bear Stearns Mortgage Securities Inc.
Series 1996-5 Class A2
10.00%, due 9/25/27 ............ 3,077,771 3,197,281
Series 1996-4 Class AI2
10.50%, due 9/25/27 ............ 2,797,949 2,930,740
Financial Asset Securitization Inc.
Series 1997-NAM2 Class FA8
10.00%, due 7/25/27 ............ 6,642,592 7,047,126
Norwest Asset Securities Corp.
Series 1997-10 Class A2
6.50%, due 8/25/27 ............. 4,351,120 4,327,189
Residential Accredit Loans, Inc.
Series 1997-QS4 Class A4
10.00%, due 5/25/27 ............ 2,796,747 2,961,699
Series 1997-QS5 Class A3
10.00%, due 6/25/27 ............ 5,046,092 5,329,127
Series 1996-QS4 Class AI2
11.00%, due 8/25/26 ............ 2,979,965 3,114,987
Series 1997-QS1 Class A6
11.00%, due 2/25/27 ............ 4,521,564 4,932,213
Residential Asset
Securitization Trust
Series 1997-A3 Class A7
10.00%, due 5/25/27 ............ 5,637,809 5,940,616
Series 1997-A5 Class A7
10.00%, due 7/25/27 ............ 2,745,104 2,889,222
Structured Asset Securities Corp.
Series 1996-2 Class A1
7.00%, due 8/25/26 ............. 3,671,000 3,692,218
---------------
46,362,418
---------------
Total Mortgage-Backed Securities
(Cost $63,155,725) ............. 63,405,790
---------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
MainStay Total Return Fund
<TABLE>
<CAPTION>
Principal
Amount Value
========================================
U.S. GOVERNMENT & FEDERAL AGENCIES (17.3%)
<S> <C> <C>
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (MORTGAGE PASS-
THROUGH SECURITIES) (3.7%)
6.515%, due 12/1/03 (e) ........ $ 1,119,881 $ 1,104,091
6.52%, due 12/1/03 (e) ......... 1,841,591 1,816,122
6.525%, due 12/1/03 (e) ........ 2,864,931 2,834,505
6.595%, due 1/1/04 (e) ......... 3,007,680 2,977,092
7.50%, due 7/14/27 TBA (c) ..... 35,630,000 35,732,614
---------------
44,464,424
---------------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION I (MORTGAGE PASS-
THROUGH SECURITIES) (3.6%)
6.50%, due 12/15/23 (e) ........ 12,360,151 11,919,882
7.00%, due 12/15/23 (e) ........ 17,058,490 16,842,529
7.50%, due 7/25/27 TBA (c) ..... 6,050,000 6,097,311
9.50%, due 12/15/17 - 5/15/22 (e) 7,515,760 8,161,552
---------------
43,021,274
---------------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION II (MORTGAGE PASS-
THROUGH SECURITIES) (2.1%)
6.875%, due 10/20/22 ARM (e)(h) 7,566,674 7,788,982
7.125%, due 9/20/23 - 8/20/25
ARM (e)(h) ..................... 16,933,424 17,394,228
---------------
25,183,210
---------------
UNITED STATES TREASURY BONDS (3.6%)
6.625%, due 2/15/27 (b) ........ 28,060,000 27,455,026
8.875%, due 8/15/17 (b) ........ 5,845,000 7,119,035
12.00%, due 8/15/13 (b) ........ 6,760,000 9,515,782
---------------
44,089,843
---------------
UNITED STATES TREASURY NOTES (4.3%)
5.50%, due 11/15/98 (b) ........ 6,200,000 6,163,172
5.625%, due 11/30/00 (b) ....... 9,370,000 9,178,196
6.25%, due 2/28/02 (b) ......... 25,770,000 25,624,915
7.75%, due 11/30/99 ............ 8,550,000 8,847,882
7.875%, due 11/15/04 ........... 2,300,000 2,482,206
---------------
52,296,371
---------------
Total U.S. Government &
Federal Agencies
(Cost $207,193,360) ............ 209,055,122
---------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
========================================
YANKEE BONDS (2.8%)
<S> <C> <C>
BANKS (0.8%)
Dao Heng Bank Ltd.
7.75%, due 1/24/07 (d) ......... $ 5,200,000 $ 5,213,468
Export Import Bank Korea
6.50%, due 11/15/06
(put date 11/15/03) ............ 4,225,000 4,090,180
---------------
9,303,648
---------------
FINANCE (0.7%)
Guangdong International
Trust & Investment Corp.
8.75%, due 10/24/16 (d) ........ 5,550,000 5,777,883
Hero Asian BVI Ltd.
9.11%, due 10/15/01 (d) ........ 1,764,152 1,833,466
Wharf Capital International 1994 Ltd.
Guaranteed
8.875%, due 11/1/04 ............ 1,205,000 1,295,496
---------------
8,906,845
---------------
FOREIGN GOVERNMENTS (0.5%)
Republic of Columbia
8.375%, due 2/15/27 ............ 2,730,000 2,645,042
Republic of South Africa
8.50%, due 6/23/17 ............. 3,465,000 3,459,248
---------------
6,104,290
---------------
INSURANCE (0.2%)
Zurich Capital Trust I Guaranteed
8.376%, due 6/1/37
(call date 6/1/07) (d) ......... 1,915,000 1,982,657
---------------
TELEPHONE UTILITIES (0.2%)
SK Telecom Co. Ltd.
7.75%, due 4/29/04 ............. 2,015,000 2,050,847
---------------
UTILITIES (0.4%)
Hydro-Quebec
Series IO
8.05%, due 7/7/24
(put date 7/7/06) .............. 4,850,000 5,277,285
---------------
Total Yankee Bonds
(Cost $33,066,855) ............. 33,625,572
---------------
Total Long-Term Bonds
(Cost $406,012,371) ............ 409,688,880
---------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE>
Portfolio of Investments (unaudited) continued
<TABLE>
<CAPTION>
Shares Value
========================================
COMMON STOCKS (63.0%)
<S> <C> <C>
AUTO PARTS (0.6%)
Lear Corp. (a) ................... 165,000 $ 7,321,875
---------------
BANKS (1.9%)
NationsBank Corp. ................ 171,000 11,029,500
Washington Mutual Inc. ........... 200,500 11,979,875
---------------
23,009,375
---------------
BUILDINGS (0.7%)
Oakwood Homes Corp. .............. 341,800 8,203,200
---------------
COMMERCIAL SERVICES (0.9%)
Service Corp. International ...... 334,000 10,980,250
---------------
COMPUTERS & OFFICE EQUIPMENT (3.8%)
Danka Business Systems PLC ADR (g) 197,000 8,052,375
Hewlett-Packard Co. .............. 186,000 10,416,000
IKON Office Solutions, Inc. ...... 158,700 3,957,581
Seagate Technology (a) ........... 237,900 8,371,106
Sun Microsystems (a) ............. 422,000 15,706,334
---------------
46,503,396
---------------
CONSUMER DURABLES (1.0%)
Harley-Davidson, Inc. ............ 240,300 11,519,381
---------------
CONSUMER FINANCIAL SERVICES (1.1%)
First Data Corp. ................. 290,300 12,755,056
---------------
CONSUMER SERVICES (0.6%)
CUC International Inc. (a) ....... 267,750 6,911,297
---------------
DRUGS (6.5%)
Amgen Inc. (a) ................... 229,300 13,328,062
Elan Corp. PLC ADR (a)(g) ........ 276,000 12,489,000
Lilly (Eli) & Co. ................ 158,000 17,271,375
Merck & Co., Inc. ................ 120,000 12,420,000
Schering-Plough Corp. ............ 310,000 14,841,250
Teva Pharmaceutical Industries
Ltd. ADR (g) ................... 124,000 8,029,000
---------------
78,378,687
---------------
ELECTRONICS (0.4%)
Adaptec, Inc. (a) ................ 143,800 4,997,050
---------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
========================================
FINANCE (7.5%)
<S> <C> <C>
Equifax, Inc. .................... 214,000 $ 7,958,125
Fannie Mae ....................... 290,000 12,651,250
Green Tree Financial Corp. ....... 504,000 17,955,000
Household International, Inc. .... 141,400 16,605,662
MGIC Investment Corp. ............ 281,000 13,470,438
Travelers Group Inc. ............. 346,665 21,861,562
---------------
90,502,037
---------------
FINANCIAL SERVICES (2.3%)
Associates First Capital Corp. ... 147,000 8,158,500
SunAmerica Inc. .................. 401,000 19,548,750
---------------
27,707,250
---------------
HEALTH CARE (3.4%)
Cardinal Health, Inc. ............ 120,000 6,870,000
Columbia/HCA Healthcare Corp. .... 274,164 10,778,072
PacifiCare Health Systems,
Inc. Class B (a) ............... 61,400 3,921,925
Tenet Healthcare Corp. (a) ....... 292,950 8,660,334
United Healthcare Corp. .......... 200,500 10,426,000
---------------
40,656,331
---------------
HOSPITAL MANAGEMENT & SERVICES (1.0%)
HEALTHSOUTH Corp. (a) ............ 506,000 12,618,375
---------------
INDUSTRIAL (2.4%)
Illinois Tool Works Inc. ......... 162,200 8,099,862
Mattel, Inc. ..................... 60,000 2,032,500
Tyco International Ltd. .......... 280,300 19,498,369
---------------
29,630,731
---------------
INSURANCE (2.2%)
Aetna Inc. ....................... 85,000 8,701,875
American International Group, Inc. 121,000 18,074,375
---------------
26,776,250
---------------
LEISURE (0.6%)
Mirage Resorts Inc. (a) .......... 284,400 7,181,100
---------------
MATERIALS/PROCESSING (0.8%)
Monsanto Co. ..................... 217,700 9,374,706
---------------
MEDICAL EQUIPMENT (4.3%)
Guidant Corp. .................... 186,000 15,810,000
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE>
MainStay Total Return Fund
<TABLE>
<CAPTION>
Shares Value
========================================
COMMON STOCKS (Continued)
<S> <C> <C>
MEDICAL EQUIPMENT (Continued)
Johnson & Johnson ................ 260,188 $ 16,749,603
Medtronic, Inc. .................. 245,000 19,845,000
---------------
52,404,603
---------------
OIL & GAS EXPLORATION (0.6%)
Triton Energy Ltd. (a) ........... 157,600 7,220,050
---------------
POLLUTION & RELATED (0.5%)
USA Waste Services Inc. (a) ...... 148,000 5,716,500
---------------
RESTAURANTS & LODGING (1.6%)
HFS Inc. (a) ..................... 329,100 19,087,800
---------------
RETAIL (6.0%)
Bed, Bath & Beyond, Inc. (a) ..... 150,000 4,556,250
Home Depot, Inc. (The) ........... 153,500 10,581,906
Kohl's Corp. (a) ................. 234,000 12,387,375
Kroger Co. (a) ................... 358,000 10,382,000
Lowe's Companies, Inc. ........... 202,000 7,499,250
Nike, Inc. Class B ............... 130,600 7,623,775
Safeway Inc. (a) ................. 299,100 13,795,988
Staples, Inc. (a) ................ 255,300 5,935,725
---------------
72,762,269
---------------
SOFTWARE (3.6%)
Computer Associates International, Inc. 364,250 20,284,172
Compuware Corp. (a) .............. 211,500 10,099,125
Microsoft Corp. (a) .............. 108,000 13,648,500
---------------
44,031,797
---------------
TECHNOLOGY (6.0%)
Cisco Systems, Inc. (a) .......... 171,500 11,511,937
Intel Corp. ...................... 138,300 19,612,669
Linear Technology Corp. .......... 198,000 10,246,500
Oracle Corp. (a) ................. 340,500 17,152,688
3Com Corp. (a) ................... 306,000 13,770,000
---------------
72,293,794
---------------
TELECOMMUNICATION SERVICES (2.2%)
Lucent Technologies Inc. ......... 207,000 14,916,938
WorldCom, Inc. (a) ............... 367,728 11,767,296
---------------
26,684,234
---------------
<CAPTION>
Shares Value
========================================
TEXTILE & APPAREL (0.5%)
<S> <C> <C>
Nine West Group Inc. (a) ......... 174,200 $ 6,652,262
---------------
Total Common Stocks
(Cost $424,858,032) ............ 761,879,656
---------------
<CAPTION>
Principal
Amount
=================
SHORT-TERM INVESTMENTS (5.8%)
<S> <C> <C>
COMMERCIAL PAPER (3.5%)
Ford Motor Credit Co.
6.11%, due 7/1/97 .............. $ 19,840,000 19,840,000
Prudential Funding Corp.
5.53%, due 7/2/97 .............. 23,000,000 23,000,000
---------------
Total Commercial Paper
(Cost $42,840,000) ............. 42,840,000
---------------
FEDERAL AGENCIES (2.3%)
Federal Mortgage Corp.
Discount Notes
5.72%, due 7/7/97 .............. 21,945,000 21,928,541
5.72%, due 7/11/97 ............. 5,700,000 5,691,498
---------------
Total Federal Agencies
(Cost $27,623,428) ............. 27,620,039
---------------
Total Short-Term Investments
(Cost $70,463,428) ............. 70,460,039
---------------
Total Investments
(Cost $901,333,831) (i) ........ 102.6% 1,242,028,575(j)
Liabilities in Excess of
Cash and Other Assets .......... (2.6) (31,814,506)
--------------- ---------------
Net Assets ....................... 100.0% $ 1,210,214,069
=============== ===============
</TABLE>
- ----------
(a) Non-income producing securities.
(b) Represents securities out on loan or a portion which is out on loan.
(c) TBA: Securities purchased on a forward commitment basis with an approximate
principal amount and maturity date. The actual principal amount and
maturity date will be determined upon settlement.
(d) May be sold to institutional investors only.
(e) Segregated as collateral for TBA.
(f) Floating rate. Rate shown is the rate in effect at June 30, 1997.
(g) ADR--American Depository Receipt.
(h) ARM--Adjustable Rate Mortgage. Resets annually.
(i) The cost for Federal income tax purposes is $901,540,906.
(j) At June 30, 1997 net unrealized appreciation was $340,487,669, based on
cost for Federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $344,785,650 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $4,297,981.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
<PAGE>
Statement of Assets and Liabilities as of June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investment in securities, at value
(identified cost $901,333,831) .............................. $1,242,028,575
Cash .......................................................... 2,653
Receivables:
Investment securities sold .................................. 79,893,432
Dividends and interest ...................................... 4,924,760
Fund shares sold ............................................ 727,530
--------------
Total assets .............................................. 1,327,576,950
--------------
LIABILITIES:
Payables:
Investment securities purchased ............................. 111,188,053
NYLIFE Distributors ......................................... 960,939
Fund shares redeemed ........................................ 513,186
Adviser ..................................................... 305,229
Transfer agent .............................................. 269,284
Custodian ................................................... 12,516
Trustees .................................................... 7,245
Accrued expenses .............................................. 212,251
Dividend payable .............................................. 3,894,178
--------------
Total liabilities .......................................... 117,362,881
--------------
Net assets .................................................... $1,210,214,069
==============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding
(par value of $.01 per share)
unlimited number of shares authorized:
Class A ..................................................... $ 42,298
Class B ..................................................... 512,493
Additional paid-in capital .................................... 830,925,688
Accumulated undistributed net investment income ............... 142,614
Accumulated undistributed net realized gain on investments .... 37,896,232
Net unrealized appreciation on investments .................... 340,694,744
--------------
Net assets .................................................... $1,210,214,069
==============
CLASS A
Net assets applicable to outstanding shares ................... $ 92,244,327
==============
Shares of beneficial interest outstanding ..................... 4,229,846
==============
Net asset value per share outstanding ......................... $ 21.81
Maximum sales charge (5.50% of offering price) ................ 1.27
--------------
Maximum offering price per share outstanding .................. $ 23.08
==============
CLASS B
Net assets applicable to outstanding shares ................... $1,117,969,742
==============
Shares of beneficial interest outstanding ..................... 51,249,344
==============
Net asset value and offering price per share outstanding ...... $ 21.81
==============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
<PAGE>
Statement of Operations for the six months ended June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Income:
Dividends (a) ............................................... $ 1,779,021
Interest .................................................... 15,380,168
--------------
Total income .............................................. 17,159,189
--------------
Expenses:
Distribution--Class B ....................................... 2,399,287
Administration .............................................. 1,746,853
Advisory .................................................... 1,746,853
Service ..................................................... 1,414,387
Transfer agent .............................................. 1,186,485
Shareholder communication ................................... 162,913
Custodian ................................................... 71,646
Recordkeeping ............................................... 70,391
Professional ................................................ 40,502
Registration ................................................ 38,859
Trustees .................................................... 14,880
Miscellaneous ............................................... 7,519
--------------
Total expenses ............................................ 8,900,575
--------------
Net investment income ......................................... 8,258,614
--------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments .............................. 33,930,403
Net change in unrealized appreciation on investments .......... 61,381,356
--------------
Net realized and unrealized gain on investments ............... 95,311,759
--------------
Net increase in net assets resulting from operations .......... $ 103,570,373
==============
</TABLE>
- ----------
(a) Dividends recorded net of foreign withholding taxes of $8,012.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six months
ended Year ended
June 30, December 31,
1997* 1996
=============== ===============
INCREASE IN NET ASSETS:
<S> <C> <C>
Operations:
Net investment income ............................... $ 8,258,614 $ 14,310,063
Net realized gain on investments .................... 33,930,403 27,774,121
Net change in unrealized appreciation on investments 61,381,356 78,230,207
--------------- ---------------
Net increase in net assets resulting from operations 103,570,373 120,314,391
--------------- ---------------
Dividends and distributions to shareholders:
From net investment income:
Class A ........................................... (766,916) (997,501)
Class B ........................................... (7,349,084) (13,385,811)
From net realized gain on investments:
Class A ........................................... -- (1,702,480)
Class B ........................................... -- (25,348,019)
--------------- ---------------
Total dividends and distributions to shareholders (8,116,000) (41,433,811)
--------------- ---------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ........................................... 24,078,838 63,597,398
Class B ........................................... 78,125,160 191,433,792
Net asset value of shares issued to shareholders
in reinvestment of dividends and distributions:
Class A ........................................... 376,682 2,679,639
Class B ........................................... 3,737,459 37,951,434
--------------- ---------------
106,318,139 295,662,263
Cost of shares redeemed:
Class A ............................................ (8,452,651) (20,159,616)
Class B ............................................ (81,958,880) (135,617,553)
--------------- ---------------
Increase in net assets derived from
capital share transactions ..................... 15,906,608 139,885,094
--------------- ---------------
Net increase in net assets ....................... 111,360,981 218,765,674
NET ASSETS:
Beginning of period ................................... 1,098,853,088 880,087,414
--------------- ---------------
End of period ......................................... $ 1,210,214,069 $ 1,098,853,088
=============== ===============
Accumulated undistributed net investment income ....... $ 142,614 $ --
=============== ===============
</TABLE>
- ----------
* Unaudited.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class B
=========================================
Class A Class B Class A Class B Class A Class B September 1
======= ======= ======= ======= ======= ======= through Year ended August 31
Six months ended Year ended Year ended December 31 ============================
June 30, 1997* December 31, 1996 December 31, 1995 1994** 1994 1993 1992
================== =================== ================== ====== ====== ====== ======
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period... $20.09 $20.10 $18.53 $18.53 $14.76 $14.76 $15.28 $15.42 $13.37 $13.89
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income... 0.19 0.14 0.37 0.27 0.42 0.33 0.11 0.38 0.33 0.22
Net realized and
unrealized gain (loss)
on investments........ 1.72 1.71 2.07 2.08 3.77 3.77 (0.52) (0.02) 2.31 0.32
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations............ 1.91 1.85 2.44 2.35 4.19 4.10 (0.41) 0.36 2.64 0.54
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less dividends and
distributions:
From net investment
income................ (0.19) (0.14) (0.37) (0.27) (0.42) (0.33) (0.11) (0.37) (0.36) (0.23)
From net realized gain
on investments........ -- -- (0.51) (0.51) -- -- -- (0.13) (0.23) (0.83)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total dividends and
distributions......... (0.19) (0.14) (0.88) (0.78) (0.42) (0.33) (0.11) (0.50) (0.59) (1.06)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value at end
of period............. $21.81 $21.81 $20.09 $20.10 $18.53 $18.53 $14.76 $15.28 $15.42 $13.37
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total investment
return (a)............ 9.57% 9.27% 13.22% 12.73% 28.66% 27.96% (2.65%) 2.41% 20.09% 3.96%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income............ 1.88%+ 1.42%+ 1.9% 1.4% 2.5% 2.0% 2.5%+ 2.5% 2.4% 1.7%
Expenses........... 1.15%+ 1.61%+ 1.1% 1.6% 1.1% 1.7% 1.7%+ 1.7% 1.8% 2.0%
Portfolio turnover rate 79% 79% 173% 173% 228% 228% 74% 273% 340% 316%
Average commission
rate paid............. $0.0595 $ 0.0595 $0.0599 $ 0.0599 (b) (b) (b) (b) (b) (b)
Net assets at end of
period (in 000's)..... $92,244 $1,117,970 $68,975 $1,029,878 $19,206 $860,881 $648,725 $639,619 $486,959 $292,002
</TABLE>
- ----------
* Unaudited
** The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is not
annualized.
(b) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
22
<PAGE>
Notes to Financial Statements (unaudited)
Note 1--Organization and Business:
The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business
Trust. The Trust is registered under the Investment Company Act of 1940, as
amended, (the "Act") as an open-end management investment company and is
comprised of fourteen funds. These financial statements and notes relate only to
MainStay Total Return Fund (the "Fund").
The Fund currently offers two classes of shares. Class A shares, whose
distributions commenced on January 3, 1995, are offered at net asset value per
share plus an initial sales charge. Class B shares are offered without an
initial sales charge, although a declining contingent deferred sales charge may
be imposed on redemptions made within six years of purchase. Class A shares and
Class B shares bear the same voting (except for issues that relate solely to one
class), dividend, liquidation and other rights and conditions except that the
Class B shares are subject to higher distribution fee rates. Each class of
shares bears distribution and/or service fee payments under a distribution plan
pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The Fund's investment objective is to realize current income consistent with
reasonable opportunity for future growth of capital and income.
Note 2--Significant Accounting Policies:
The following is a summary of significant accounting policies followed by the
Fund:
Valuation of Fund Shares. The net asset value per share of each class of shares
is calculated on each day the New York Stock Exchange (the "Exchange") is open
for trading as of the close of regular trading on the Exchange. The net asset
value per share of each class of shares is determined by taking the assets
attributable to a class of shares, subtracting the liabilities attributable to
that class, and dividing the result by the outstanding shares of that class.
Securities Valuation. Portfolio securities of the Fund are stated at value
determined (a) by appraising common and preferred stocks which are traded on the
New York Stock Exchange at the last sale price on that day or, if no sale
occurs, at the mean between the closing bid and asked prices, (b) by appraising
common and preferred stocks traded on other United States national securities
exchanges or foreign securities exchanges as nearly as possible in the manner
described in (a) by reference to their principal exchange, including the
National Association of Securities Dealers National Market System, (c) by
appraising over-the-counter securities quoted on the National Association of
Securities Dealers NASDAQ system (but not listed on the National Market System)
at the bid price supplied through such system, (d) by appraising
over-the-counter securities not quoted on the NASDAQ system at prices supplied
by the pricing agent or brokers selected by the Adviser, if these prices are
deemed to be representative of market values at the regular close of business of
the New York Stock Exchange, (e) by appraising debt securities at prices
supplied by a pricing agent selected by the Adviser, whose prices reflect
broker/dealer supplied valuations and electronic data processing techniques if
those prices are deemed by the Adviser to be representative of market values at
the regular close of
23
<PAGE>
MainStay Total Return Fund
business of the New York Stock Exchange and (f) by appraising all other
securities and other assets, including debt securities for which prices are
supplied by a pricing agent but are not deemed by the Adviser to be
representative of market values, but excluding money market instruments with a
remaining maturity of sixty days or less and including restricted securities and
securities for which no market quotations are available, at fair value in
accordance with procedures approved by the Trustees. Short-term securities which
mature in more than 60 days are valued at current market quotations. Short-term
securities which mature in 60 days or less are valued at amortized cost if their
term to maturity at purchase was 60 days or less, or by amortizing the
difference between market value on the 61st day prior to maturity and value on
maturity date if their original term to maturity at purchase exceeded 60 days.
Mortgage Dollar Rolls. The Fund enters into mortgage dollar roll transactions
("MDRs") for which it sells mortgage-backed securities ("MBS") from its
portfolio to a counterparty from whom it simultaneously agrees to buy a similar
security on a delayed delivery basis. The MDR transactions of the Fund are
classified as purchase and sale transactions. The securities sold in connection
with the MDRs are removed from the portfolio and a realized gain or loss is
recognized. The securities the Fund has agreed to acquire are included at market
value in the portfolio of investments and liability for such purchase
commitments is included as payables for investments purchased. The Fund
maintains a segregated account with its custodian containing securities from its
portfolio having a value not less than the repurchase price, including accrued
interest. MDR transactions involve certain risks, including the risk that the
MBS returned to the Fund at the end of the roll, while substantially similar,
could be inferior to what was initially sold to the counterparty.
Securities Lending. The Fund may lend its securities to broker-dealers and
financial institutions. The loans are secured by collateral at least equal at
all times to the market value of the securities loaned. The Fund may bear the
risk of delay in recovery of, or loss of rights in, the securities loaned should
the borrower of the securities fail financially. The Fund receives compensation
for lending its securities in the form of fees or it retains a portion of
interest on the investment of any cash received as collateral. The Fund also
continues to receive interest and dividends on the securities loaned and any
gain or loss in the market price of the securities loaned that may occur during
the term of the loan will be for the account of the Fund.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes withheld at the source.
Dividends and Distributions to Shareholders. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
quarterly. Income dividends and capital gain distributions are determined in
accordance with Federal income tax regulations which may differ from generally
accepted accounting principles.
24
<PAGE>
Notes to Financial Statements (unaudited) continued
Security Transactions and Investment Income. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method and include gains
and losses from repayments of principal on mortgage backed securities. Dividend
income is recognized on the ex-dividend date and interest income is accrued
daily except when collection is not expected. Discounts on securities purchased
for the Fund are accreted on the constant yield method over the life of the
respective securities or, if applicable, over the period to the first call date.
Expenses. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when allocations of direct expenses can otherwise fairly be
made. The investment income and expenses (other than expenses incurred under the
Distribution Plan) and realized and unrealized gains and losses on investments
of the Fund are allocated to separate classes of shares based upon their
relative net asset value on the date the income is earned or expenses and
realized and unrealized gains and losses are incurred.
Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from these estimates.
Note 3--Fees and Related Party Policies:
Investment Advisory and Administration Fees. MacKay-Shields Financial
Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an
Investment Advisory Agreement. MacKay-Shields is a registered investment adviser
and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New
York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect
wholly-owned subsidiary of New York Life, is the Administrator for the Fund.
The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and facilities furnished at an annual
rate of the Fund's average net assets of 0.32% on assets up to $500 million and
0.30% on assets in excess of $500 million.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"). The
Fund, with respect to each class of shares, has adopted a Distribution Plan (the
"Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Class A Plan, the Distributor receives payments from the Fund at
an annual rate of 0.25% of the average daily net assets of the Fund's Class A
shares, which is an expense of the Class A shares of the Fund for distribution
or service activities as designated by the Distributor. Pursuant to the Class B
Plan, the
25
<PAGE>
MainStay Total Return Fund
Fund's Class B shares are subject to the payment of a monthly distribution fee,
which is an expense of the Class B shares of the Fund, at the annual rate of
0.75% of the lesser of:
(a) the aggregate gross sales of the Fund's Class B shares since the inception
of the Fund (not including reinvestment of dividends or capital gains
distributions), less the aggregate net asset value of the Fund's Class B shares
exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or upon which such charge has been
waived; or (b) the average daily net assets of the Fund's Class B shares.
The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund. Service fee as shown on the statement of
operations represents the fees for both Class A shares and Class B shares.
The Plan provides that the distribution fee is payable to NYLIFE Distributors
regardless of the amounts actually expended by NYLIFE Distributors for
distribution of the Fund's shares and service activities.
NYLIFE Distributors anticipates that its actual distribution expenditures will
substantially exceed the distribution fee received by it during the initial
years of the operation of the Plan and that in later years its expenditures may
be less than the distribution fee.
Sales Charges. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $27,897 for the six
months ended June 30, 1997. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges on redemptions of Class B shares of
$485,332 for the six months ended June 30, 1997.
Trustees Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee
of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus
reimbursement for travel and out-of-pocket expenses. The Trust allocates this
expense in proportion to the net assets of the respective Funds.
Other. NYLIFE Distributors has received $93,511 for providing the Fund certain
transfer agency services for the period January 1, 1997, through April 30, 1997.
Effective May 1, 1997, MainStay Shareholder Services Inc. ("MSS"), an indirect
wholly owned subsidiary of New York Life Insurance Company, was appointed
Transfer, Dividend Disbursing and Shareholder Servicing Agent. MSS was paid
$21,210 for services rendered May 1, 1997, through June 30, 1997.
Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $19,239 for the six months ended
June 30, 1997.
26
<PAGE>
Notes to Financial Statements (unaudited) continued
Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the six months ended June 30, 1997, amounted to
$70,391.
Note 4--Fund Securities Loaned:
At June 30, 1997, the Total Return Fund had portfolio securities with a fair
market value of $83,210,518 on loan to broker-dealers and government securities
dealers. With respect to these securities loaned, the Fund received collateral
with a fair market value of $86,479,169.
Note 5--Purchases and Sales of Securities (in 000's):
During the six months ended June 30, 1997, purchases and sales of U.S.
Government securities, other than short-term securities, were $536,709 and
$501,321, respectively. Purchases and sales of securities, other than U.S.
Government securities, securities subject to repurchase transactions and
short-term securities, were $356,512 and $384,002, respectively.
Note 6--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1997* December 31, 1996
================= =================
Class A Class B Class A Class B
======= ======= ======= =======
<S> <C> <C> <C> <C>
Shares sold ......................................................... 1,189 3,795 3,241 9,841
Shares issued in reinvestment of dividends and distributions ........ 19 192 170 1,889
----- ----- ----- ------
1,208 3,987 3,411 11,730
Shares redeemed ..................................................... (412) (3,985) (1,015) (6,942)
----- ----- ----- ------
Net increase ........................................................ 796 2 2,396 4,788
===== ===== ===== ======
</TABLE>
- ----------
* Unaudited.
27
<PAGE>
The MainStay Funds
<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund graph indicating of companies in expanding markets and are willing to accept a higher
risk/reward of with strong growth potential level of risk for higher return potential
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in a portfolio that tracks You seek a conservative way to partici-
Equity Index Fund graph indicating the makeup and returns of the pate in the growth potential of stocks+
risk/reward of S&P 500*
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Offers broad diversification into You prefer the higher return potential
INTERNATIONAL EQUITY FUND graph indicating international stock markets with of international equities or want to
risk/reward of an emphasis on risk control add diversification to your domestic
Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Convertible Fund [Horizontal bar Invests in convertible securities for You want income from securities that
graph indicating a special blend of long-term growth may offer growth potential if converted
As of 6/2/97, this Fund risk/reward of potential and dividend income into common stock
was closed to new Fund]
investors.
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Balances current income with growth You seek a combination of income and
TOTAL RETURN FUND graph indicating opportunities by investing in stocks, growth potential and want to manage
risk/reward of bonds, and money market instruments risk through diversification
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks undervalued stocks with You seek to maximize total return from
Value Fund graph indicating attractive dividends and a stimulus securities which may have more poten-
risk/reward of for positive change tial than the market currently sees
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's.
+ The original investment is guaranteed provided it is held for 10 years with
all dividend and capital gain distributions reinvested. If shares are
redeemed prior to or after the one-day guarantee date, the investor loses
the benefit of the guarantee with respect to those shares.
++ Investments in foreign securities may be subject to greater risks than
domestic investments. These risks include currency fluctuations, changes in
U.S. or foreign tax or currency laws, and changes in monetary policies and
economic and political conditions in foreign countries.
(S) While individual securities owned by the Government Fund may be guaranteed
by the U.S. government and its agencies, the share price of the Fund is not
guaranteed and will fluctuate with market conditions.
|| Certain of the Fund's investments may be speculative.
# Investments in the Money Market Fund are neither insured nor guaranteed by
the U.S. government and there is no assurance that the Fund will be able to
maintain a stable net asset value of $1.00 per share; investment returns
will vary with market conditions.
** A small portion of the Fund's income may be subject to state and local
taxes and the Alternative Minimum Tax. Capital gains, if any, may also be
taxed.
28
<PAGE>
INCOME FUNDS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Seeks a high level of current income You are seeking to combine high
Government Fund graph indicating consistent with safety of principal current income and safety of principal
risk/reward of primarily from U.S. government
Fund] securities(S)
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar An aggressive high-yield bond You want to maximize
High Yield graph indicating fund that is actively managed for and can accept the higher risk of
Corporate Bond Fund risk/reward of maximum current income|| securities with high yield potential
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current yields and You prefer the higher return potential
International Bond Fund graph indicating competitive total return from non- of international bonds or want to
risk/reward of U.S. bonds with an emphasis on add diversification to your domestic
Fund] risk control investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating stability of principal, and liquidity, competitive yields on cash you're plan-
risk/reward of with free checkwriting# ning to spend or invest in the near future
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks current income and competi- You seek to combine the return potential
Strategic Income Fund graph indicating tive overall return by investing in of high-grade, high-yield,|| and inter-
risk/reward of a diversified portfolio of domestic national bonds and want to manage risk
Fund] and foreign debt securities++ through multimarket diversification
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Seeks high current income exempt You are a California resident and want to
California Tax Free Fund graph indicating from both federal and California keep more of what you earn by invest-
risk/reward of income taxes consistent with ing for income that's double tax free**
Fund] preservation of capital**
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are a New York State or City resident
New York Tax Free Fund graph indicating from federal, New York State, and and want to keep more of what you earn
risk/reward of New York City income taxes consis- with income that's double or triple tax
Fund] tent with preservation of capital** free**
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are in a high federal income tax
Tax Free Bond Fund graph indicating from regular federal income tax con- bracket or want to pay less of your
risk/reward of sistent with preservation of capital** investment income to the IRS
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A word about risk and reward
The "thermometers" in the tables above show how much risk the investor must
assume and the related return potential. Generally speaking, investments with
higher return potential also carry higher risks. So, the longer the indicator
bar, the higher the risk and reward potential of the Fund.
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send any money. Shares
must be offered in the investor's state of residence.
29
<PAGE>
- --------------------------------------------------------------------------------
MAINSTAY
Total Return Fund
- --------------------------------------------------------------------------------
[GRAPHIC]
Semiannual Report
June 30, 1997
Unaudited
[LOGO] MAINSTAY (R)
FUNDS
OFFICERS & TRUSTEES
Alice T. Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
[LOGO] MAINSTAY(R) FUNDS
NYLIFE Distributors Inc.
Morris Corporate Center, Building A
300 Interpace Parkway
Parsippany, New Jersey 07054
Administrator & Distributor of The MainStay Funds
http://www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly owned subsidiary of
New York Life Insurance Company.
[LOGO] NEW YORK LIFE
This report is provided for the information of shareholders of the MainStay
Total Return Fund. It may be given to others only when preceded or accompanied
by an effective MainStay Funds prospectus. This report does not offer to sell
any securities or solicit orders to buy them.
(C)1997. All rights reserved. MSSA15-08/97
[GRAPHIC]
<PAGE>
Table of Contents
Chairperson's Letter 2
MainStay Value Fund Highlights 4
$10,000 Invested in the MainStay
Value Fund versus S&P 500 and
Inflation--Class A & Class B Shares 5
Portfolio Management Discussion and Analysis 6
Year-by-Year & Six-Month Performance 7
Diversification by Industry--Top 5 8
Portfolio Composition 9
Returns & Lipper Rankings 10
Top 10 Equity Holdings 11
10 Largest Purchases 11
10 Largest Sales 11
Portfolio of Investments 12
Unaudited Financial Statements 15
Notes to Financial Statements 19
The MainStay Funds 24
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
Chairperson's Letter
After a remarkable six-year period of expansion, the U.S. economy continued to
grow throughout the first half of 1997. For most investors, the overall impact
was positive, but there were some rough seas along the way.
As the stock market made gains early in the year, concerns about the possibility
of impending inflation brought increased price volatility. In late March, the
Federal Reserve Board moved to raise interest rates in an effort to slow
economic growth. Although this preemptive strike helped keep inflation in check,
the initial reaction from both the stock and bond markets was negative. As a
result, bond prices faltered and stocks tumbled more than 9% from their peak
before both markets began to stabilize.
As employment figures, earnings estimates, and other indicators began to suggest
that economic growth was slowing in the second quarter, the stock market not
only recovered lost ground, but soared to record highs. With higher valuations,
however, the market became increasingly volatile, reacting severely to any news
that could signal a shift in buying patterns or interest rates.
Positive performance, emerging concerns
Despite the volatility, domestic stock and bond markets closed the first half of
1997 with positive returns. While Malaysia and Singapore had negative results,
most international markets performed well. Given these results, many investors
are once again celebrating their good fortune. The underlying volatility,
however, should serve to remind us that the level of growth we've enjoyed for
more than six years is not typical market behavior.
Certainly no one can predict what will happen next, so it's important to keep
recent performance in perspective. We believe that having realistic
expectations, as well as a long-range plan and diversified investments can help
you work toward achieving your goals, wherever the markets may move.
Solid team approach
At MainStay(R), we believe our risk-averse approach can help provide reassurance
to many investors, particularly in uncertain times. Each MainStay Fund is
managed by a team of experienced professionals who employ disciplined investment
strategies to seek competitive returns with careful attention to downside risk.
Our team approach offers investors a combination of experience, insight, and
market perspective that few individuals could provide on their own. It also
helps provide important checks and balances in security selection, market
evaluation, and overall accountability.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
Our Fund managers believe that strong companies tend to get stronger in up
markets and perform better than average when the markets go down. Using
selection criteria appropriate to the individual Funds they manage, they may
look for specific catalysts that are likely to stimulate growth, enhance value,
or increase yield without taking on unnecessary risk.
Looking forward
As we move into the second half of 1997, we expect that an intensified focus on
inflation, interest rates, and corporate earnings will account for much of the
momentum driving the market. Regardless of how events unfold, you can be
confident that we will hold true to our disciplined management approach.
At MainStay, we believe that having a close relationship with your Registered
Representative is one of the best ways to keep your long-term focus in any
market environment. Therefore, we urge you to speak with your Registered
Representative regularly--whether the market happens to be up or down--so he or
she can understand your needs and help keep you on a steady course.
While we've seen positive results for the first half of the year, we remain
somewhat cautious. Whatever the future brings, we'll continue to provide the
information, service, and support you can consider when making decisions--and
the prudent management you depend on to pursue your long-range goals.
Sincerely,
/s/ Alice T. Kane
Alice T. Kane
July 1997
- --------------------------------------------------------------------------------
3
<PAGE>
MainStay Value Fund Highlights
MARKET HIGHLIGHTS
FOR THE 6 MONTHS ENDED 6/30/97
- --------------------------------------------------------------------------------
o The stock market started the year on a strong note, then dropped during a
five-week period in March and early April, finally recovering to record
highs.
o The greatest gains were among a small number of large-capitalization
issues, which experienced large inflows from foreign institutional
investors.
o Interest-rate sensitive issues reacted severely to rising interest rates
but outperformed the market in the second quarter.
- --------------------------------------------------------------------------------
FUND HIGHLIGHTS FOR THE
6- AND 12-MONTH PERIODS ENDED 6/30/97
- --------------------------------------------------------------------------------
o One-year total returns of 25.90% and 25.25% for Class A shares and Class B
shares, respectively, excluding all sales charges, as of 6/30/97.
o Interest-rate sensitive stocks, particularly insurance companies, were
among the Fund's strongest performers.
o Both share classes underperformed the average Lipper* growth and income
fund for the six months ended 6/30/97.
- --------------------------------------------------------------------------------
- ----------
* See footnote + and table on page 10 for more information on Lipper
Analytical Services, Inc.
4
<PAGE>
$10,000 Invested in the MainStay
Value Fund versus S&P 500
and Inflation
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period-end MainStay Value Fund S&P 500* Inflation+
- ---------- ------------------- -------- ----------
<S> <C> <C> <C>
5/1/86 $ 9,450.00 $10,000.00 $10,000.00
12/86 $ 8,551.31 $10,518.00 $10,193.00
12/87 $ 8,331.40 $11,070.00 $10,644.00
12/88 $ 9,673.68 $12,903.00 $11,113.00
12/89 $11,741.80 $16,983.00 $11,629.00
12/90 $11,031.80 $16,457.00 $12,355.00
12/91 $15,583.00 $21,460.00 $12,724.00
12/92 $18,625.10 $23,093.00 $13,100.00
12/93 $21,148.20 $25,412.00 $13,459.00
12/94 $21,102.10 $25,747.00 $13,809.00
12/95 $27,166.10 $35,412.00 $14,168.00
12/96 $33,099.00 $43,536.00 $14,637.00
6/97 $36,671.00 $52,512.00 $14,738.00
</TABLE>
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period-end MainStay Value Fund S&P 500* Inflation+
- ---------- ------------------- -------- ----------
<S> <C> <C> <C>
5/1/86 $10,000.00 $10,000.00 $10,000.00
12/86 $ 9,049.00 $10,518.00 $10,193.00
12/87 $ 8,816.30 $11,070.00 $10,644.00
12/88 $10,236.70 $12,903.00 $11,113.00
12/89 $12,425.20 $16,983.00 $11,629.00
12/90 $11,673.90 $16,457.00 $12,355.00
12/91 $16,490.00 $21,460.00 $12,724.00
12/92 $19,709.10 $23,093.00 $13,100.00
12/93 $22,379.10 $25,412.00 $13,459.00
12/94 $22,330.30 $25,747.00 $13,809.00
12/95 $28,585.00 $35,412.00 $14,168.00
12/96 $34,620.00 $43,536.00 $14,637.00
6/97 $38,272.00 $52,512.00 $14,738.00
</TABLE>
- ----------
The Class A graph assumes an initial investment of $10,000 made on 5/1/86
reflecting the effect of the 5.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,450 and includes the historical
performance of the Class B shares for periods from inception (5/1/86)
through 12/31/94. The Class B graph assumes an initial investment of
$10,000 made on 5/1/86. Returns shown do not reflect the Contingent
Deferred Sales Charge (CDSC), as it would not apply for the period shown.
All results include reinvestment of distributions at net asset value and
the change in share price for the stated period. Past performance is no
guarantee of future results.
* "Standard & Poor's 500 Composite Stock Price Index" and "S&P 500" are
registered trademarks of Standard & Poor's. The S&P 500 is an unmanaged
index and is considered to be generally representative of the U.S. stock
market. Results assume the reinvestment of all income and capital gain
distributions.
+ Inflation is represented by the Consumer Price Index (CPI), which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.
[GRAPHIC]
5
<PAGE>
Portfolio Management Discussion and Analysis
The first half of 1997 was a dynamic and volatile period in the stock market.
Carrying momentum from the fourth quarter of 1996, equities rose early in the
year. Then in March and April, in anticipation and reaction to the Federal
Reserve Board's move to increase interest rates, the market declined 9.8% in a
sharp correction. As economic growth slowed, the ensuing recovery brought
----------
unexpected stock price gains, led by a small number of large-capitalization
--------------
issues. Foreign institutional investors contributed to the rally by pouring
money into large and liquid issues.
Although most investors anticipated a correction, the speed and magnitude of the
recovery appeared to dramatically shorten traditional investment cycles.
-----------------
During the reporting period, the equity markets were highly volatile, with daily
gains or losses of 100 points or more being common, making this one of the most
volatile periods in recent history. Even so, there were some strong value
sectors--most notably interest-rate sensitive issues--that performed well on an
absolute and relative basis over the first half of 1997.
Given this context, how did the MainStay Value Fund do over the first half of
1997?
For the six months ended 6/30/97, the MainStay Value Fund returned 10.79% and
10.55% for Class A shares and Class B shares, respectively, excluding all sales
charges. While these returns are close to the historical averages for an entire
year, both share classes lagged the average Lipper* growth and income fund,
which returned 15.52% for the same period.
What were the primary reasons for the Fund's underperformance?
During the first half of the year, much of the return in the S&P 500+ came from
a small number of large-capitalization stocks that did not fit the Fund's
investment profile. The Fund is geared towards companies with low
price-to-earnings (P/E) and low price to cash flow ratios. More specifically,
- ----------------- -------------------------
the value stocks we emphasized ranged from $7.5 billion to $15 billion in market
capitalization, in sharp contrast to the market's preference for stocks with
market capitalizations in excess of $20 billion. As a result, the Fund was
automatically excluded from participating in a large part of what made the
market rise.
How did your disciplines help investors?
Using our strict, bottom-up stock selection process, we had identified
---------
interest-rate sensitive issues, particularly insurance companies, as an area
that offered potentially outstanding value. While this sector was hit hard
during the correction, its recovery in the second quarter provided good returns
--------
for the Fund.
Which insurance and financial issues did well?
There were several. Travelers was up 40%,++ American International Group
advanced 38%, and NationsBank rose 34%. Allstate and Chubb each provided returns
over 25%, and Transamerica gained 19%. We purchased Transamerica throughout much
of the first and second quarters of the year.
[GRAPHIC]
Correction
- ----------
A shift in security prices that brings them more in line with historically
appropriate levels.
Capitalization
- --------------
The amount of outstanding equity a company has issued. Companies may vary
greatly in the amount of equity capital they have raised, and their
capitalization may change with new issues or stock repurchases.
Investment cycle
- ----------------
The time it takes for a market to expand and contract, or move from current
levels to new highs and new lows.
Price-to-earnings ratio
- -----------------------
The price of a stock divided by its earnings per share.
- ----------
* See footnote and table on page 10 for more information on Lipper Analytical
Services, Inc.
+ See page 5 for more information on the S&P 500.
++ Returns reflect performance during the period securities were held in the
Fund.
6
<PAGE>
YEAR-BY-YEAR & SIX-MONTH PERFORMANCE
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period-end Total Return %
- ----------- --------------
<S> <C>
12/86 -9.51
12/87 -2.57
12/88 16.11
12/89 21.38
12/90 -6.05
12/91 41.26
12/92 19.52
12/93 13.55
12/94 -0.22
12/95 28.74 Class A
12/95 28.01 Class B
12/96 21.84 Class A
12/96 21.11 Class B
6/97 10.79 Class A
6/97 10.55 Class B
</TABLE>
- ----------
Returns are for Class B shares unless otherwise noted. See footnote * on page 10
for more information on performance.
The company was actively restructuring, auctioning off subsidiaries that didn't
fit its core business, and providing direct incentives for managers to improve
stock performance. We look for these kinds of catalysts to identify value.
What other major decisions did you make during the reporting period?
We selectively increased the Fund's positions in basic materials companies. We
believe auto-related and paper stocks are two of the most undervalued sectors,
and we have increased our holdings there. In general, these economically
sensitive sectors underperformed the broad market averages in the first half of
1997.
What happened in the basic materials sector?
Basic materials stocks such as paper and chemicals suffered from continued poor
pricing, coming off of 1996 with high inventories. Also, fertilizer stocks (i.e.
Agrium and IMC Global) were hurt from poor planting conditions related to bad
weather.
Late last year you began buying utilities. What happened in that area?
We continued to purchase utilities as the Fund's proprietary valuation criteria
showed they had high potential. The Fund is currently slightly overweighted in
------------
this sector and we may continue to strengthen the Fund's utility positions in
the future. We believe there are many opportunities among aggressive utilities
that can take advantage of deregulation.
While the utility sector underperformed during the first half of 1997, we see
strong future potential in names like LILCO and PECO Energy. PECO, for example,
is actively repurchasing shares. Niagara Mohawk was an underperformer. On the
other hand, Brooklyn Union Gas saw the same potential we did in Long Island
Lighting (LILCO)and offered to merge with the company, which contributed
positively to the Fund's performance.
What other significant purchases did you make?
Columbia/HCA, a health care company, was the Fund's largest purchase during the
[GRAPHIC]
Price to cash flow ratio
- ------------------------
The relationship between the price of a stock and the amount of free cash flow
the company is able to generate.
Bottom-up investing
- -------------------
Security selection based on the specific fundamental merits of individual
issues. The opposite of "top-down" investing, which starts with general economic
trends, compares market sectors, and uses relative security values to narrow the
range of issues to examine.
Recovery
- --------
A market recovery refers to a rise in security prices that were formerly
depressed. An economic recovery refers to a general improvement in formerly weak
fundamentals underlying a country's gross domestic product.
7
<PAGE>
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 6/30/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Industry Percentage
- --------------------------------------------------
<S> <C>
Banks 7.5%
Retail 6.7%
Utilities-Electric 6.1%
Chemicals 5.8%
Health Care 5.8%
All Other 68.1%
</TABLE>
- ----------
Actual percentages will vary over time.
reporting period. We began investing for the Fund after the stock corrected
sharply. The company owns hospitals and has consistent growth with high free
cash flow, and has other characteristics that we believe are attractive within
our investment framework. After we purchased the stock for the Fund, the company
announced a one billion dollar share repurchase.
We also bought Banc One when, after acquiring First USA, it became the lowest
price-to-earnings (P/E) and lowest price to cash flow stock in the entire
financial services sector.
Were there other significant purchases?
Toys "R" Us was an excellent value story. We bought the stock based on its low
P/E and substantial free cash flow. The company has dynamic product flow due to
the biggest lineup of blockbuster movies in recent years. The stock was up
around 20% through 6/30/97.
What about sales during the first half of the year?
Conrail was sold when it was acquired by CSX and Norfolk Southern at a price
substantially higher than what the Fund paid for its shares. This contributed
positively to performance.
Xerox appreciated over 52% in the first six months of 1997, and according to the
Fund's management disciplines, we started cutting back on the Fund's position.
Philip Morris was another position we cut back on. Given the rising multiples of
the stock and the uncertainties faced by the company, we reduced the Fund's
holdings just before the March correction.
Which of the Fund's securities didn't do well?
We switched out of Stone Container and into Georgia-Pacific where we saw a
better risk/reward tradeoff. Humana, a health care company, was the Fund's
largest sale.
[GRAPHIC]
Weighting
- ---------
The proportion of a portfolio allocated to a specific security or sector, i.e.,
a fund is said to be overweighted in a sector when that portion of the portfolio
is greater than the sector's general relationship to the market as a whole.
8
<PAGE>
We had expected a faster turnaround, and took advantage of a recovery in the
stock price as a selling opportunity.
Were there other stocks that underperformed in the Fund?
Areas of weakness included energy-related stocks due to lower oil and natural
gas prices (Unocal, Occidental, MAPCO, and Seagull Energy). However, we believe
this group appears significantly undervalued based upon discount to transaction
value and we expect a consolidation theme to unfold over the next 6-12 months.
As we mentioned earlier, agriculture-related stocks experienced a continued
setback due to weather-related conditions.
How is the Fund currently positioned?
Right now, the Fund is overweighted in consumer cyclicals, materials processing,
utilities, and transportation, and underweighted in health care and consumer
staples.
What risks do you see on the horizon?
The biggest risk lies in valuation overall--with stock prices now selling at or
near historical valuation highs, investors are anticipating a continuation of
the current ideal investment environment. Any disappointment on the inflation
front and/or in corporate earnings could lead to further downside price
volatility.
Denis Laplaige
Jeffrey A. Simon
Portfolio Managers
PORTFOLIO COMPOSITION AS OF 6/30/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percentage
- ----------------------------------------------------------------
<S> <C>
Common Stocks 91.4%
Preferred Stocks 0.7%
Cash, Eqivalents & Other Assets, less Libilities 7.9%
</TABLE>
- ----------
Actual percentages will vary over time.
[GRAPHIC]
9
<PAGE>
Returns & Lipper Rankings as of 6/30/97
<TABLE>
<CAPTION>
Fund average annual total returns*
- --------------------------------------------------------------------------------
Life of Fund
1 year 5 years 10 years through 6/30/97
<S> <C> <C> <C> <C>
Class A 25.90% 17.18% 13.63% 12.90%
Class B 25.25% 16.85% 13.47% 12.76%
- --------------------------------------------------------------------------------
<CAPTION>
Fund SEC returns*
- --------------------------------------------------------------------------------
Life of Fund
1 year 5 years 10 years through 6/30/97
<S> <C> <C> <C> <C>
Class A 18.97% 15.86% 12.99% 12.33%
Class B 20.25% 16.64% 13.47% 12.76%
- --------------------------------------------------------------------------------
<CAPTION>
Fund Lipper+ rankings & Lipper category returns as of 6/30/97
- --------------------------------------------------------------------------------
Life of Fund
1 year 5 years 10 years through 6/30/97
<S> <C> <C> <C> <C>
Class A 405 out of n/a n/a n/a
547 funds
Class B 424 out of 134 out of 39 out of 79 out of
547 funds 216 funds 127 funds 111 funds
Average Lipper
growth and
income fund 28.07% 17.25% 12.67% 13.20%
- --------------------------------------------------------------------------------
<CAPTION>
Fund per share net asset values & distributions for the six months ended 6/30/97
- --------------------------------------------------------------------------------
NAV 6/30/97 Income Capital Gains
<S> <C> <C> <C>
Class A $22.40 $0.1278 $0.0000
Class B $22.38 $0.0786 $0.0000
- --------------------------------------------------------------------------------
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested.
Class A shares, first offered to the public on 1/3/95, are sold with a
maximum initial sales charge of 5.5% and an annual 12b-1 fee of .25%.
Performance figures for this class include the historical performance of
the Class B shares for periods from inception (5/1/86) up to 12/31/94.
Performance data for the two classes after this date vary based on
differences in their expense structures. Class B shares of the Fund are
sold with no initial sales charge, but are subject to a maximum CDSC of up
to 5% if shares are redeemed during the first 6 years of purchase and an
annual 12b-1 fee of up to 1%.
+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales
charges. Lipper averages listed above are not class specific. Life of Fund
return is from the period of the Class B shares' initial offering through
6/30/97. The Fund's Class A shares were first offered to the public on
1/3/95; Class B shares on 5/1/86.
[GRAPHIC]
10
<PAGE>
Top 10 Equity Holdings as of 6/30/97
<TABLE>
<CAPTION>
HOLDING AMOUNT
- --------------------------------------------------------------------------------
<S> <C>
Tenneco Inc. $32,923,612
Columbia/HCA Healthcare Corp. 30,840,656
Banc One Corp. 28,432,812
Time Warner Inc. 26,344,500
International Business Machines Corp. 26,136,337
Toys "R" Us, Inc. 26,124,000
Xerox Corp. 24,372,375
Allstate Corp. (The) 23,877,570
Aetna Inc. 23,679,338
IMC Global Inc. 21,840,000
- --------------------------------------------------------------------------------
10 Largest Purchases for the six months ended 6/30/97
<CAPTION>
SECURITY AMOUNT OF PURCHASE
- --------------------------------------------------------------------------------
<S> <C>
Columbia/HCA Healthcare Corp. $26,693,558
Banc One Corp. 25,979,441
Time Warner Inc. 25,525,500
Foundation Health Systems, Inc. 21,493,575
Toys "R" Us, Inc. 21,067,549
PG&E Corp. 20,229,412
Transamerica Corp. 19,059,553
Owens-Illinois Inc. 18,365,093
Pinnacle West Capital Corp. 17,738,237
Georgia-Pacific Corp. 17,513,488
- --------------------------------------------------------------------------------
10 Largest Sales for the six months ended 6/30/97
<CAPTION>
SECURITY AMOUNT OF SALE
- --------------------------------------------------------------------------------
<S> <C>
Humana Inc. $23,676,895
Elf Aquitaine ADR 18,945,190
WellPoint Health Networks Inc. 17,740,815
Xerox Corp. 16,525,825
Conrail Inc. 16,066,352
PanEnergy Corp. 15,586,856
Philip Morris Cos. 15,296,238
Armstrong World Industries, Inc. 14,945,312
International Business Machines Corp. 14,634,747
Chubb Corp. 12,561,258
- --------------------------------------------------------------------------------
</TABLE>
[GRAPHIC]
- ---------
This breakdown is provided for informational purposes only. The Fund's holdings
may change daily. All purchases and sales are aggregated by issuer. A
shareholder owns shares of the Fund but does not own a direct interest in any of
the specific securities listed. Short-term securities are excluded. See
Portfolio of Investments for specific type of security held.
11
<PAGE>
MainStay Value Fund
<TABLE>
<CAPTION>
Shares Value
==========================
<S> <C> <C>
COMMON STOCKS (91.4%)+
AEROSPACE/DEFENSE ELECTRONICS (0.8%)
Litton Industries, Inc. (a) .................. 225,800 $ 10,908,963
--------------
AIRLINES (1.4%)
AMR Corp. (a) ................................ 204,300 18,897,750
--------------
AUTO MANUFACTURING (2.7%)
Ford Motor Co. ............................... 550,700 20,788,925
General Motors Corp. ......................... 259,100 14,428,631
--------------
35,217,556
--------------
AUTO PARTS (2.8%)
Echlin Inc. .................................. 575,300 20,710,800
Mark IV Industries, Inc. ..................... 649,845 15,596,280
--------------
36,307,080
--------------
BANKS (7.5%)
Banc One Corp. ............................... 587,000 28,432,812
Bankers Trust New York Corp. ................. 158,000 13,746,000
Chase Manhattan Corp. ........................ 153,000 14,850,563
NationsBank Corp. ............................ 227,386 14,666,397
PNC Bank Corp. ............................... 341,200 14,202,450
Wells Fargo & Co. ............................ 47,200 12,720,400
--------------
98,618,622
--------------
CAPITAL GOODS (2.7%)
Case Corp. ................................... 165,100 11,371,263
Xerox Corp. .................................. 309,000 24,372,375
--------------
35,743,638
--------------
CHEMICALS (5.8%)
Agrium Inc. .................................. 1,064,500 12,241,750
Dow Chemical Co. ............................. 149,800 13,051,325
Georgia Gulf Corp. ........................... 471,700 13,708,781
IMC Global Inc. .............................. 624,000 21,840,000
Imperial Chemical Industries,
PLC ADR (b) ................................ 66,100 3,759,438
PPG Industries, Inc. ......................... 208,000 12,090,000
--------------
76,691,294
--------------
COMPUTERS & OFFICE EQUIPMENT (2.1%)
Lexmark International Group, Inc.
Class A (a) ................................ 430,200 13,067,325
Storage Technology Corp. (a) ................. 314,000 13,973,000
--------------
27,040,325
--------------
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
<TABLE>
<CAPTION>
Shares Value
==========================
<S> <C> <C>
CONGLOMERATES (3.4%)
American Standard Cos. Inc. (a) .............. 265,200 $ 11,867,700
Tenneco Inc. ................................. 728,600 32,923,612
--------------
44,791,312
--------------
CONTAINERS (1.5%)
Owens-Illinois Inc. (a) ...................... 647,800 20,081,800
--------------
DOMESTIC OIL (4.1%)
Amerada Hess Corp. ........................... 92,100 5,117,306
Louisiana Land & Exploration Co.
(The) ...................................... 239,200 13,664,300
Noble Affiliates, Inc. ....................... 185,500 7,176,531
Parker & Parsley Petroleum Co. ............... 259,000 9,162,125
Unocal Corp. ................................. 495,400 19,227,713
--------------
54,347,975
--------------
ENERGY (3.5%)
Coastal Corp. (The) .......................... 308,300 16,397,706
MAPCO Inc. ................................... 493,400 15,542,100
Seagull Energy Corp. (a) ..................... 770,400 13,482,000
--------------
45,421,806
--------------
FINANCE (3.2%)
Transamerica Corp. ........................... 226,000 21,145,125
Travelers Group Inc. ......................... 328,957 20,744,851
--------------
41,889,976
--------------
FOOD (1.0%)
IBP, Inc. .................................... 541,700 12,594,525
--------------
FOOD, BEVERAGES & TOBACCO (3.9%)
Philip Morris Cos. ........................... 386,100 17,133,187
RJR Nabisco Holdings Corp. ................... 575,700 18,998,100
UST Inc. ..................................... 561,100 15,570,525
--------------
51,701,812
--------------
HEALTH CARE (5.8%)
Aetna Inc. ................................... 231,300 23,679,338
Columbia/HCA Healthcare Corp. ................ 784,500 30,840,656
Foundation Health Systems, Inc. (a) .......... 692,400 20,988,375
--------------
75,508,369
--------------
HOUSEHOLD PRODUCTS (2.0%)
Premark International, Inc. .................. 521,000 13,936,750
Tupperware Corp. ............................. 346,500 12,647,250
--------------
26,584,000
--------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE>
Portfolio of Investments June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
Shares Value
==========================
<S> <C> <C>
COMMON STOCKS (Continued)
INSURANCE (5.6%)
Allstate Corp. (The) ......................... 327,090 $ 23,877,570
American International Group, Inc. ........... 142,950 21,353,156
Chubb Corp. .................................. 245,100 16,391,063
Equitable Cos., Inc. (The) ................... 345,700 11,494,525
--------------
73,116,314
--------------
INTERNATIONAL OIL (2.4%)
British Petroleum Co., PLC ADR (b) ........... 188,000 14,076,500
Occidental Petroleum Corp. ................... 696,800 17,463,550
--------------
31,540,050
--------------
PAPER & FOREST PRODUCTS (4.8%)
Bowater Inc. ................................. 403,700 18,671,125
Chesapeake Corp. ............................. 255,900 8,636,625
Georgia-Pacific Corp. ........................ 230,100 19,644,788
Rayonier Inc. ................................ 216,950 9,125,459
Temple-Inland Inc. ........................... 126,000 6,804,000
--------------
62,881,997
--------------
RAILROADS (4.1%)
CSX Corp. .................................... 318,200 17,660,100
Illinois Central Corp. ....................... 462,450 16,156,847
Union Pacific Corp. .......................... 282,900 19,944,450
--------------
53,761,397
--------------
RECREATION & ENTERTAINMENT (2.0%)
Time Warner Inc. ............................. 546,000 26,344,500
--------------
RETAIL (6.7%)
Dillard's Inc. ............................... 236,000 8,171,500
Federated Department Stores,
Inc. (a) ................................... 593,200 20,613,700
Great Atlantic & Pacific Tea Co.,
Inc. (The) ................................. 215,000 5,845,313
Kroger Co. (a) ............................... 471,800 13,682,200
Penney (J.C.) Co., Inc. ...................... 246,700 12,874,656
Toys "R" Us, Inc. (a) ........................ 746,400 26,124,000
--------------
87,311,369
--------------
TECHNOLOGY (2.0%)
International Business Machines
Corp. ...................................... 289,800 26,136,337
--------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
==========================
<S> <C> <C>
TEXTILE & APPAREL (1.9%)
Burlington Industries, Inc. (a) .............. 459,700 $ 5,516,400
Fruit of the Loom, Inc. Class A (a) .......... 108,400 3,360,400
Reebok International Ltd. .................... 348,000 16,269,000
--------------
25,145,800
--------------
TIRE & RUBBER (1.4%)
Goodyear Tire & Rubber Co. (The) ............. 279,300 17,683,181
--------------
TRANSPORTATION (0.2%)
Arkansas Best Corp. (a) ...................... 338,000 3,084,250
--------------
UTILITIES-ELECTRIC (6.1%)
GPU, Inc. .................................... 230,700 8,276,362
Long Island Lighting Co. ..................... 763,000 17,549,000
Niagara Mohawk Power Corp. (a) ............... 953,100 8,160,919
PECO Energy Co. .............................. 674,200 14,158,200
PG&E Corp. ................................... 892,500 21,643,125
Pinnacle West Capital Corp. .................. 318,600 9,577,913
--------------
79,365,519
--------------
Total Common Stocks
(Cost $986,208,168) ........................ 1,198,717,517
--------------
PREFERRED STOCKS (0.7%)
DOMESTIC OIL (0.1%)
Parker & Parsley Capital LLC
6.25% (c) .................................. 27,000 1,707,750
--------------
INTERNATIONAL OIL (0.6%)
Occidental Petroleum Corp.
$3.875 (c) ................................. 130,000 7,605,000
--------------
Total Preferred Stocks
(Cost $8,393,375) .......................... 9,312,750
--------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
MainStay Value Fund
<TABLE>
<CAPTION>
Principal
Amount Value
================================
<S> <C> <C>
SHORT-TERM INVESTMENTS (7.3%)
COMMERCIAL PAPER (7.3%)
Beneficial Corp.
5.50%, due 7/3/97 ...................... $ 9,284,000 $ 9,284,000
General Electric Co.
5.67%, due 7/7/97 ...................... 30,755,000 30,755,000
Norwest Corp.
5.51%, due 7/1/97 ...................... 31,042,000 31,042,000
Prudential Funding Corp.
5.53%, due 7/2/97 ...................... 24,091,000 24,091,000
--------------
Total Short-Term Investments
(Cost $95,172,000) ..................... 95,172,000
--------------
Total Investments
(Cost $1,089,773,543) (d) .............. 99.4% 1,303,202,267(e)
Cash and Other Assets,
Less Liabilities ....................... 0.6 8,422,946
-------------- --------------
Net Assets ............................... 100.0% $1,311,625,213
============== ==============
</TABLE>
- -----------
(a) Non-income producing securities.
(b) ADR--American Depository Receipt.
(c) May be sold to institutional investors only.
(d) The cost for Federal income tax purposes is $1,089,815,282.
(e) At June 30, 1997, net unrealized appreciation was $213,386,985, based on
cost for Federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $227,152,373 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $13,765,388.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Statement of Assets and Liabilities as of June 30, 1997 (unaudited)
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $1,089,773,543) .......................................... $1,303,202,267
Cash ......................................................................................................... 881
Receivables:
Investment securities sold ................................................................................. 47,499,239
Dividends and interest ..................................................................................... 3,171,316
Fund shares sold ........................................................................................... 2,209,773
--------------
Total assets .............................................................................................. 1,356,083,476
--------------
LIABILITIES:
Payables:
Investment securities purchased ............................................................................ 39,712,047
NYLIFE Distributors ........................................................................................ 1,040,829
Fund shares redeemed ....................................................................................... 623,409
Adviser .................................................................................................... 303,651
Transfer agent ............................................................................................. 271,552
Custodian .................................................................................................. 14,830
Trustees ................................................................................................... 6,493
Accrued expenses ............................................................................................. 197,650
Dividend payable ............................................................................................. 2,287,802
--------------
Total liabilities ......................................................................................... 44,458,263
--------------
Net assets ................................................................................................... $1,311,625,213
==============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized:
Class A .................................................................................................... $ 43,274
Class B .................................................................................................... 542,645
Additional paid-in capital ................................................................................... 979,437,554
Accumulated undistributed net investment income .............................................................. 9,161
Accumulated undistributed net realized gain on investments ................................................... 118,163,855
Net unrealized appreciation on investments ................................................................... 213,428,724
--------------
Net assets ................................................................................................... $1,311,625,213
==============
CLASS A
Net assets applicable to outstanding shares .................................................................. $ 96,916,835
==============
Shares of beneficial interest outstanding .................................................................... 4,327,374
==============
Net asset value per share outstanding ........................................................................ $ 22.40
Maximum sales charge (5.50% of offering price) ............................................................... 1.30
--------------
Maximum offering price per share outstanding ................................................................. $ 23.70
==============
CLASS B
Net assets applicable to outstanding shares .................................................................. $1,214,708,378
==============
Shares of beneficial interest outstanding .................................................................... 54,264,492
==============
Net asset value and offering price per share outstanding ..................................................... $ 22.38
==============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
Statement of Operations for the six months ended June 30, 1997 (unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a) .............................................. $ 12,074,804
Interest ................................................... 1,782,219
------------
Total income .............................................. 13,857,023
------------
Expenses:
Distribution--Class B ...................................... 2,615,632
Administration ............................................. 1,687,817
Advisory ................................................... 1,687,817
Service .................................................... 1,467,147
Transfer agent ............................................. 1,347,976
Shareholder communication .................................. 147,826
Recordkeeping .............................................. 72,770
Custodian .................................................. 69,243
Registration ............................................... 66,794
Professional ............................................... 40,721
Trustees ................................................... 15,216
Miscellaneous .............................................. 8,492
------------
Total expenses ............................................ 9,227,451
------------
Net investment income ........................................ 4,629,572
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments ............................. 97,757,515
Net change in unrealized appreciation on investments ......... 19,514,835
------------
Net realized and unrealized gain on investments .............. 117,272,350
------------
Net increase in net assets resulting from operations ......... $121,901,922
============
</TABLE>
- ----------
(a) Dividends recorded net of foreign withholding taxes of $35,207.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six months
ended Year ended
June 30, December 31,
1997* 1996
============== ==============
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income .......................................................................... $ 4,629,572 $ 9,701,611
Net realized gain on investments ............................................................... 97,757,515 92,855,281
Net change in unrealized appreciation on investments ........................................... 19,514,835 75,689,305
-------------- --------------
Net increase in net assets resulting from operations ........................................... 121,901,922 178,246,197
-------------- --------------
Dividends and distributions to shareholders:
From net investment income:
Class A ....................................................................................... (539,438) (748,274)
Class B ....................................................................................... (4,195,993) (8,838,317)
From net realized gain on investments:
Class A ....................................................................................... -- (5,171,720)
Class B ....................................................................................... -- (73,072,126)
-------------- --------------
Total dividends and distributions to shareholders ........................................... (4,735,431) (87,830,437)
-------------- --------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ....................................................................................... 26,956,245 54,270,033
Class B ....................................................................................... 163,181,103 263,788,646
Net asset value of shares issued to shareholders in reinvestment of dividends and distributions:
Class A ....................................................................................... 261,461 5,840,804
Class B ....................................................................................... 2,123,302 80,291,437
-------------- --------------
192,522,111 404,190,920
Cost of shares redeemed:
Class A ....................................................................................... (11,886,194) (16,170,142)
Class B ....................................................................................... (78,743,737) (119,967,686)
-------------- --------------
Increase in net assets derived from capital share transactions .............................. 101,892,180 268,053,092
-------------- --------------
Net increase in net assets .................................................................. 219,058,671 358,468,852
NET ASSETS:
Beginning of period .............................................................................. 1,092,566,542 734,097,690
-------------- --------------
End of period .................................................................................... $1,311,625,213 $1,092,566,542
============== ==============
Accumulated undistributed net investment income .................................................. $ 9,161 $ 115,020
============== ==============
</TABLE>
- ----------
* Unaudited.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A Class B Class A Class B Class A Class B
============= ============= =============== ============= ============= ===============
Six months ended Year ended Year ended
June 30, 1997* December 31, 1996 December 31, 1995
============================= ============================== ==============================
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ..... $20.34 $20.32 $18.25 $18.25 $14.66 $14.66
------------- ------------- --------------- ------------- ------------- ---------------
Net investment income ..... 0.13 0.08 0.30 0.20 0.29 0.19
Net realized and
unrealized gain (loss)
on investments .......... 2.06 2.06 3.66 3.64 3.91 3.91
------------- ------------- --------------- ------------- ------------- ---------------
Total from investment
operations .............. 2.19 2.14 3.96 3.84 4.20 4.10
------------- ------------- --------------- ------------- ------------- ---------------
Less dividends and
distributions:
From net investment
income .................. (0.13) (0.08) (0.30) (0.20) (0.29) (0.19)
From net realized gain on
investments ............. -- -- (1.57) (1.57) (0.32) (0.32)
------------- ------------- --------------- ------------- ------------- ---------------
Total dividends and
distributions ........... (0.13) (0.08) (1.87) (1.77) (0.61) (0.51)
------------- ------------- --------------- ------------- ------------- ---------------
Net asset value at end
of period ............... $22.40 $22.38 $20.34 $20.32 $18.25 $18.25
============= ============= =============== ============= ============= ===============
Total investment return (a) 10.79% 10.55% 21.84% 21.11% 28.74% 28.01%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income ............... 1.23%+ 0.75%+ 1.6% 1.1% 1.5% 0.9%
Expenses ............... 1.13%+ 1.61%+ 1.1% 1.6% 1.2% 1.8%
Portfolio turnover rate ... 36% 36% 47% 47% 48% 48%
Average commission
rate paid ............... $0.0595 $0.0595 $0.0595 $0.0595 (b) (b)
Net assets at end of
period (in 000's) ....... $96,917 $1,214,708 $73,259 $1,019,307 $25,258 $708,840
<CAPTION>
Class B
================================================================
September 1
through Year ended August 31
December 31 ===============================================
1994** 1994 1993 1992
=============== =============== =============== ===============
<S> <C> <C> <C> <C>
Net asset value at
beginning of period ..... $16.30 $15.90 $13.82 $13.27
--------------- --------------- --------------- ---------------
Net investment income ..... 0.04 0.06 0.07 0.12
Net realized and
unrealized gain (loss)
on investments .......... (1.03) 1.04 3.40 1.64
--------------- --------------- --------------- ---------------
Total from investment
operations .............. (0.99) 1.10 3.47 1.76
--------------- --------------- --------------- ---------------
Less dividends and
distributions:
From net investment
income .................. (0.03) (0.06) (0.10) (0.09)
From net realized gain on
investments ............. (0.62) (0.64) (1.29) (1.12)
--------------- --------------- --------------- ---------------
Total dividends and
distributions ........... (0.65) (0.70) (1.39) (1.21)
--------------- --------------- --------------- ---------------
Net asset value at end
of period ............... $14.66 $16.30 $15.90 $13.82
=============== =============== =============== ===============
Total investment return (a) (6.03%) 7.26% 26.58% 14.82%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income ............... 0.8%+ 0.5% 0.5% 0.8%
Expenses ............... 1.8%+ 1.9% 1.9% 1.9%
Portfolio turnover rate ... 11% 53% 77% 145%
Average commission
rate paid ............... (b) (b) (b) (b)
Net assets at end of
period (in 000's) ....... $472,365 $449,789 $226,524 $77,877
</TABLE>
- ---------
* Unaudited
** The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is not
annualized.
(b) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
<PAGE>
Notes to Financial Statements (unaudited)
Note 1--Organization and Business:
The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business
Trust. The Trust is registered under the Investment Company Act of 1940, as
amended, (the "Act") as an open-end management investment company and is
comprised of fourteen funds. These financial statements and notes relate only to
MainStay Value Fund (the "Fund").
The Fund currently offers two classes of shares. Class A shares, whose
distribution commenced on January 3, 1995, are offered at net asset value per
share plus an initial sales charge. Class B shares are offered without an
initial sales charge, although a declining contingent deferred sales charge may
be imposed on redemptions made within six years of purchase. Class A shares and
Class B shares bear the same voting (except for issues that relate solely to one
class), dividend, liquidation and other rights and conditions except that the
Class B shares are subject to higher distribution fee rates. Each class of
shares bears distribution and/or service fee payments under a distribution plan
pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The Fund's investment objective is to realize maximum long-term total return
from a combination of capital growth and income.
Note 2--Significant Accounting Policies:
The following is a summary of significant accounting policies followed by the
Fund:
Valuation of Fund Shares. The net asset value per share of each class of shares
is calculated on each day the New York Stock Exchange (the "Exchange") is open
for trading as of the close of regular trading on the Exchange. The net asset
value per share of each class of shares is determined by taking the assets
attributable to a class of shares, subtracting the liabilities attributable to
that class, and dividing the result by the outstanding shares of that class.
Securities Valuation. Portfolio securities of the Fund are stated at value
determined (a) by appraising common and preferred stocks which are traded on the
New York Stock Exchange at the last sale price on that day or, if no sale
occurs, at the mean between the closing bid and asked prices, (b) by appraising
common and preferred stocks traded on other United States national securities
exchanges or foreign securities exchanges as nearly as possible in the manner
described in (a) by reference to their principal exchange, including the
National Association of Securities Dealers National Market System, (c) by
appraising over-the-counter securities quoted on the National Association of
Securities Dealers NASDAQ system (but not listed on the National Market System)
at the bid price supplied through such system, (d) by appraising
over-the-counter securities not quoted on the NASDAQ system at prices supplied
by the pricing agent or brokers selected by the Adviser, if these prices are
deemed to be representative of market values at the regular close of business of
the New York Stock Exchange. Short-term securities which mature in more than 60
days are valued at current market quotations. Short-term securities which mature
in 60 days or less are valued at amortized cost if their term to maturity at
purchase was 60 days or less, or by amortizing the difference between market
value
19
<PAGE>
MainStay Value Fund
on the 61st day prior to maturity and value on maturity date if their original
term to maturity at purchase exceeded 60 days.
Events affecting the values of certain portfolio securities that occur between
the close of trading on the principal market for such securities (foreign
exchanges and over-the-counter markets) and the regular close of the New York
Stock Exchange will not be reflected in the Fund's calculation of net asset
value unless the Adviser believes that the particular event would materially
affect net asset value, in which case an adjustment would be made.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes withheld at the source.
Dividends and Distributions to Shareholders. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
quarterly. Income dividends and capital gain distributions are determined in
accordance with federal income tax regulations which may differ from generally
accepted accounting principles.
Security Transactions and Investment Income. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued daily.
Expenses. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when allocations of direct expenses can otherwise fairly be
made. The investment income and expenses (other than expenses incurred under the
Distribution Plan) and realized and unrealized gains and losses on investments
of the Fund are allocated to separate classes of shares based upon their
relative net asset value on the date the income is earned or expenses and
realized and unrealized gains and losses are incurred.
Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
20
<PAGE>
Notes to Financial Statements (unaudited) continued
Note 3--Fees and Related Party Policies:
Investment Advisory and Administration Fees. MacKay-Shields Financial
Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an
Investment Advisory Agreement. MacKay-Shields is a registered investment adviser
and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New
York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect
wholly-owned subsidiary of New York Life, is the Administrator for the Fund.
The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an annual
rate of the Fund's average daily net assets of 0.36% on assets up to $200
million, 0.325% on assets from $200 million to $500 million and 0.25% on assets
in excess of $500 million.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"). The
Fund, with respect to each class of shares, has adopted a Distribution Plan (the
"Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Class A Plan, the Distributor receives payments from the Fund at
an annual rate of 0.25% of the average daily net assets of the Fund's Class A
shares, which is an expense of the Class A shares of the Fund for distribution
or service activities as designated by the Distributor. Pursuant to the Class B
Plan, the Fund's Class B shares are subject to the payment of a monthly
distribution fee, which is an expense of the Class B shares of the Fund, at the
annual rate of 0.75% of the lesser of:
(a) the aggregate gross sales of the Fund's Class B shares since the inception
of the Fund (not including reinvestment of dividends or capital gains
distributions), less the aggregate net asset value of the Fund's Class B shares
exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or upon which such charge has been
waived; or (b) the average daily net assets of the Fund's Class B shares.
The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund. Service fee as shown on the statement of
operations represents the fees for both Class A shares and Class B shares.
The Plan provides that the distribution fee is payable to NYLIFE Distributors
regardless of the amounts actually expended by NYLIFE Distributors for
distribution of the Fund's shares and service activities.
NYLIFE Distributors anticipates that its actual distribution expenditures will
substantially exceed the distribution fee received by it during the initial
years of the operation of the Plan and that in later years its expenditures may
be less than the distribution fee.
Sales Charges. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $59,426 for the six
months ended June 30, 1997. The Fund was also
21
<PAGE>
MainStay Value Fund
advised that NYLIFE Distributors retained contingent deferred sales charges on
redemptions of Class B shares of $468,607 for the six months ended June 30,
1997.
Trustees Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee
of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus
reimbursement for travel and out-of-pocket expenses. The Trust allocates this
expense in proportion to the net assets of the respective Funds.
Other. NYLIFE Distributors has received $96,851 for providing the Fund certain
transfer agency services for the period January 1, 1997, through April 30, 1997.
Effective May 1, 1997, MainStay Shareholder Services Inc. ("MSS"), an indirect
wholly owned subsidiary of New York Life Insurance Company, was appointed
Transfer, Dividend Disbursing and Shareholder Servicing Agent. MSS was paid
$22,909 for services rendered May 1, 1997, through June 30, 1997.
Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $19,719 for the six months ended
June 30, 1997.
Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the six months ended June 30, 1997, amounted to
$72,770.
Note 4--Purchases and Sales of Securities (in 000's):
During the six months ended June 30, 1997, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $460,478 and $395,881,
respectively.
Note 5--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Year ended
Six months ended December 31,
June 30, 1997* 1996
================== ==================
Class A Class B Class A Class B
======= ======= ======= =======
<S> <C> <C> <C> <C>
Shares sold ................................................ 1,279 7,762 2,750 13,467
Shares issued in reinvestment of dividends and distributions 13 105 287 3,942
------- ------- ------- -------
1,292 7,867 3,037 17,409
Shares redeemed ............................................ (568) (3,755) (818) (6,103)
------- ------- ------- -------
Net increase ............................................... 724 4,112 2,219 11,306
======= ======= ======= =======
</TABLE>
- ---------
* Unaudited.
22
<PAGE>
This page intentionally left blank
23
<PAGE>
The MainStay Funds
<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund graph indicating of companies in expanding markets and are willing to accept a higher
risk/reward of with strong growth potential level of risk for higher return potential
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in a portfolio that tracks You seek a conservative way to partici-
Equity Index Fund graph indicating the makeup and returns of the pate in the growth potential of stocks+
risk/reward of S&P 500*
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Offers broad diversification into You prefer the higher return potential
International Equity Fund graph indicating international stock markets with of international equities or want to
risk/reward of an emphasis on risk control add diversification to your domestic
Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Convertible Fund [Horizontal bar Invests in convertible securities for You want income from securities that
As of 6/2/97, this Fund graph indicating a special blend of long-term growth may offer growth potential if converted
was closed to new risk/reward of potential and dividend income into common stock
investors. Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Balances current income with growth You seek a combination of income and
Total Return Fund graph indicating opportunities by investing in stocks, growth potential and want to manage
risk/reward of bonds, and money market instruments risk through diversification
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks undervalued stocks with You seek to maximize total return from
VALUE FUND graph indicating attractive dividends and a stimulus securities which may have more poten-
risk/reward of for positive change tial than the market currently sees
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's.
+ The original investment is guaranteed provided it is held for 10 years with
all dividend and capital gain distributions reinvested. If shares are
redeemed prior to or after the one-day guarantee date, the investor loses
the benefit of the guarantee with respect to those shares.
++ Investments in foreign securities may be subject to greater risks than
domestic investments. These risks include currency fluctuations, changes in
U.S. or foreign tax or currency laws, and changes in monetary policies and
economic and political conditions in foreign countries.
(S) While individual securities owned by the Government Fund may be guaranteed
by the U.S. government and its agencies, the share price of the Fund is not
guaranteed and will fluctuate with market conditions.
|| Certain of the Fund's investments may be speculative.
# Investments in the Money Market Fund are neither insured nor guaranteed by
the U.S. government and there is no assurance that the Fund will be able to
maintain a stable net asset value of $1.00 per share; investment returns
will vary with market conditions.
** A small portion of the Fund's income may be subject to state and local
taxes and the Alternative Minimum Tax. Capital gains, if any, may also be
taxed.
24
<PAGE>
<TABLE>
<CAPTION>
INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Seeks a high level of current income You are seeking to combine high
Government Fund graph indicating consistent with safety of principal current income and safety of principal
risk/reward of primarily from U.S. government
Fund] securities(S)
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield [Horizontal bar An aggressive high-yield bond You want to maximize current income
Corporate Bond Fund graph indicating fund that is actively managed for and can accept the higher risk of
risk/reward of maximum current income|| securities with high yield potential
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current yields and You prefer the higher return potential
International Bond Fund graph indicating competitive total return from non- of international bonds or want to
risk/reward of U.S. bonds with an emphasis on add diversification to your domestic
Fund] risk control investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating stability of principal, and liquidity, competitive yields on cash you're plan-
risk/reward of with free checkwriting# ning to spend or invest in the near future
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks current income and competi- You seek to combine the return potential
Strategic Income Fund graph indicating tive overall return by investing in of high-grade, high-yield,|| and inter-
risk/reward of a diversified portfolio of domestic national bonds and want to manage risk
Fund] and foreign debt securities++ through multimarket diversification
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are a California resident and want to
California Tax Free Fund graph indicating from both federal and California keep more of what you earn by invest-
risk/reward of income taxes consistent with ing for income that's double tax free**
Fund] preservation of capital**
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are a New York State or City resident
New York Tax Free Fund graph indicating from federal, New York State, and and want to keep more of what you earn
risk/reward of New York City income taxes consis- with income that's double or triple tax
Fund] tent with preservation of capital** free**
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are in a high federal income tax
Tax Free Bond Fund graph indicating from regular federal income tax con- bracket or want to pay less of your
risk/reward of sistent with preservation of capital** investment income to the IRS
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A word about risk and reward
The "thermometers" in the tables above show how much risk the investor must
assume and the related return potential. Generally speaking, investments with
higher return potential also carry higher risks. So, the longer the indicator
bar, the higher the risk and reward potential of the Fund.
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send any money. Shares
must be offered in the investor's state of residence.
25
<PAGE>
- --------------------------------------------------------------------------------
MAINSTAY
Value Fund
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[GRAPHIC]
Semiannual Report
June 30, 1997
Unaudited
[LOGO] MAINSTAY(R)
FUNDS
OFFICERS & TRUSTEES
Alice T. Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
[LOGO] MAINSTAY(R) FUNDS
NYLIFE Distributors Inc.
Morris Corporate Center, Building A
300 Interpace Parkway
Parsippany, New Jersey 07054
Administrator & Distributor of The MainStay Funds
http://www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly owned subsidiary of
New York Life Insurance Company.
[LOGO] NEW YORK LIFE
This report is provided for the information of shareholders of the MainStay
Value Fund. It may be given to others only when preceded or accompanied by an
effective MainStay Funds prospectus. This report does not offer to sell any
securities or solicit orders to buy them.
(C)1997. All rights reserved. MSSA16-08/97
[GRAPHIC]
<PAGE>
Table of Contents
Chairperson's Letter 2
MainStay Strategic Income Fund Highlights 4
Portfolio Management Discussion and Analysis 5
Performance for the Period Ended 6/30/97 6
Diversification by Security Type 7
Portfolio Composition 9
Fund & Lipper Returns 10
Top 10 Holdings 11
10 Largest Purchases 12
10 Largest Sales 12
Portfolio of Investments 13
Unaudited Financial Statements 20
Notes to Financial Statements 24
The MainStay Funds 32
<PAGE>
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[GRAPHIC]
Chairperson's Letter
After a remarkable six-year period of expansion, the U.S. economy continued to
grow throughout the first half of 1997. For most investors, the overall impact
was positive, but there were some rough seas along the way.
As the stock market made gains early in the year, concerns about the possibility
of impending inflation brought increased price volatility. In late March, the
Federal Reserve Board moved to raise interest rates in an effort to slow
economic growth. Although this preemptive strike helped keep inflation in check,
the initial reaction from both the stock and bond markets was negative. As a
result, bond prices faltered and stocks tumbled more than 9% from their peak
before both markets began to stabilize.
As employment figures, earnings estimates, and other indicators began to suggest
that economic growth was slowing in the second quarter, the stock market not
only recovered lost ground, but soared to record highs. With higher valuations,
however, the market became increasingly volatile, reacting severely to any news
that could signal a shift in buying patterns or interest rates.
Positive performance, emerging concerns
Despite the volatility, domestic stock and bond markets closed the first half of
1997 with positive returns. While Malaysia and Singapore had negative results,
most international markets performed well. Given these results, many investors
are once again celebrating their good fortune. The underlying volatility,
however, should serve to remind us that the level of growth we've enjoyed for
more than six years is not typical market behavior.
Certainly no one can predict what will happen next, so it's important to keep
recent performance in perspective. We believe that having realistic
expectations, as well as a long-range plan and diversified investments can help
you work toward achieving your goals, wherever the markets may move.
Solid team approach
At MainStay(R), we believe our risk-averse approach can help provide reassurance
to many investors, particularly in uncertain times. Each MainStay Fund is
managed by a team of experienced professionals who employ disciplined investment
strategies to seek competitive returns with careful attention to downside risk.
Our team approach offers investors a combination of experience, insight, and
market perspective that few individuals could provide on their own. It also
helps provide important checks and balances in security selection, market
evaluation, and overall accountability.
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2
<PAGE>
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Our Fund managers believe that strong companies tend to get stronger in up
markets and perform better than average when the markets go down. Using
selection criteria appropriate to the individual Funds they manage, they may
look for specific catalysts that are likely to stimulate growth, enhance value,
or increase yield without taking on unnecessary risk.
Looking forward
As we move into the second half of 1997, we expect that an intensified focus on
inflation, interest rates, and corporate earnings will account for much of the
momentum driving the market. Regardless of how events unfold, you can be
confident that we will hold true to our disciplined management approach.
At MainStay, we believe that having a close relationship with your Registered
Representative is one of the best ways to keep your long-term focus in any
market environment. Therefore, we urge you to speak with your Registered
Representative regularly--whether the market happens to be up or down--so he or
she can understand your needs and help keep you on a steady course.
While we've seen positive results for the first half of the year, we remain
somewhat cautious. Whatever the future brings, we'll continue to provide the
information, service, and support you can consider when making decisions--and
the prudent management you depend on to pursue your long-range goals.
Sincerely,
/s/ Alice T. Kane
Alice T. Kane
July 1997
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3
<PAGE>
MainStay Strategic Income Fund Highlights
MARKET HIGHLIGHTS
FOR THE PERIOD ENDED 6/30/97
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o Overall, bond markets were relatively calm around the world for the
six-month period ended 6/30/97, benefiting from steady economic growth and
relatively stable interest rates.
o High-yield bonds underperformed in March and April, but rallied strongly in
May and June.
o U.S. bonds generally provided modest returns over the reporting period.
While emerging market debt provided higher return opportunities, foreign
market debt underperformed.
o Real rates of return--or returns after adjustments for local
inflation--were generally higher in the United States than in other
countries around the world.
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FUND HIGHLIGHTS
FOR THE PERIOD ENDED 6/30/97
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o The MainStay Strategic Income Fund began operations on 2/28/97, with 40% of
its assets allocated in domestic high-grade debt, 40% in international
bonds, and 20% in high-yield securities.
o Several of the Fund's best performing securities were defensive convertible
bonds which benefited from the strong equity market.
o All sectors in which the Fund invested contributed positively to the Fund's
overall performance.
o From 2/28/97 through 6/30/97, the Fund returned 2.97% and 2.68% for Class A
shares and Class B shares, respectively, excluding all sales
charges--outperforming the average Lipper+ multisector income fund for the
since-inception period.
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+ See footnote + and table on page 10 for more information on Lipper
Analytical Services, Inc.
4
<PAGE>
Portfolio Management Discussion and Analysis
World bond markets were relatively calm during the reporting period. In the
United States, a Federal Reserve Board move to raise interest rates at the end
of March caused bond prices to decline temporarily. A slowing economy in the
second quarter of 1997, however, led to a steady recovery. When local inflation
was subtracted from bond returns, the United States tended to outperform most
other nations.
High-yield bonds underperformed in March and April, but had strong gains in May
and June of 1997. While emerging market debt provided higher return
opportunities, foreign market debt underperformed. Overall results were positive
in each of these key sectors, providing a solid backdrop for the introduction
and initial investments of the MainStay Strategic Income Fund.
Given this context, how did the MainStay Strategic Income Fund perform for the
period ending 6/30/97?
From its inception on 2/28/97 through 6/30/97, the MainStay Strategic Income
Fund returned 2.97% and 2.68% for Class A shares and Class B shares,
respectively, excluding all sales charges. Despite its brief history, the Fund
modestly outperformed the average Lipper* multisector income fund, which
returned 2.60% for the since-inception period.
What contributed the most to the Fund's outperformance?
We believe it was our asset allocation strategy. While we can't say for sure
what other funds did, the Strategic Income Fund benefited in March and April
from its underweighting in high-yield bonds. We looked for attractive
--------------
international markets and opportunities in yield-enhancing domestic high-grade
securities. The Fund also benefited from a number of convertible securities.
What was your strategy in domestic high-grade debt?
With interest rates moving very little during the reporting period, the Fund
maintained a fairly neutral duration. While Treasuries offered positive returns,
--------
we believed there were few opportunities to enhance yield by moving up or down
the yield curve. So instead, we concentrated on markets that offered attractive
-----------
yield spreads to Treasuries, including corporate bonds, mortgage-backed
- -------------
securities, collateralized mortgage obligations, asset-backed bonds, and
low-balance loans, all of which contributed positively to performance. We also
have done considerable research in Yankee bonds and found a number of attractive
------------
names among lower-rated investment-grade credits.
Where did you invest in the high-yield bond market?
We concentrated primarily on higher- quality, short-duration credits. With
spreads to Treasuries at historically low levels, the advantages of lower-rated
credits needed to be compelling to attract our attention. But in many cases, the
compensation for taking on additional risk was not high enough for our
standards.
[GRAPHIC]
Weighting
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The proportion of a portfolio allocated to a specific security or sector, i.e.,
a fund is said to be underweighted in a sector when that portion of the
portfolio is smaller than the sector's general relationship to the market as a
whole.
Duration
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A measure of average maturity, which adjusts for the time value of the payments
investors will receive and which takes into account interest payments as well as
principal payments. Duration is a better gauge of interest-rate sensitivity than
average maturity alone.
Yield curve
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When interest rates available from various short-, intermediate-, and long-term
securities are plotted on a graph, the resulting line is known as a yield curve.
- ----------
* See footnote and table on page 10 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
PERFORMANCE FOR THE PERIOD ENDED 6/30/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period-end Total Return %
- -------------------------------------------------
<S> <C>
6/97 2.97 Class A
6/97 2.68 Class B
</TABLE>
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See footnote * on page 10 for more information on performance.
While new issuance was much higher than the same period a year before, we found
many new issues overpriced. So we turned our attention to the secondary market,
where established liquidity and information flow could work in our favor. One of
the Fund's top-performing securities was TCI Satellite Entertainment, which
dramatically improved its cash flow with an equity offering, making its
high-yield debt very attractive. The Fund realized a gain on the sale of these
bonds, selling them for about a third more than the purchase price.
What happened in the international bond markets?
We were overweighted in the United Kingdom, which rallied significantly during
the first half of 1997. The British government's decision to make the Bank of
England an independent central bank, was the catalyst for a bond rally even when
short-term interest rates rose. We think this is a positive sign that inflation
can be controlled in the U.K. without forcing the economy into a recession. We
also used diversified investments in core European countries such as Germany,
France, Italy, and Spain and invested in Sweden as well. We also purchased
Australian and New Zealand bonds which drew our attention as the central banks
lowered interest rates. These bonds contributed positively to the Fund's
performance.
Emerging markets, including Mexico, Argentina, Venezuela, and South Africa, were
also strong performers, averaging about 400 basis points over U.S. Treasuries.
------------
Mexico and Argentina have come out of recession and are now quite strong.
Venezuela is benefiting from an oil boom and the South African government has
indicated that it may reduce interest rates in the near future, which we believe
could have a positive effect on the Fund's investment portfolio. While these
markets did very well, we intentionally kept the Fund's allocations to emerging
markets small during the reporting period.
Is currency risk a big concern for the Fund?
Most of the Fund's international bonds are substantially hedged to reduce the
------
potential
[GRAPHIC]
Yield spread
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The difference in yield between securities in different market sectors, such as
high-yield securities and Treasury issues--or between different securities in a
single sector, such as intermediate-term and short-term Treasury issues.
Yankee bonds
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Dollar-denominated bonds issued in the United States by foreign banks and
corporations, usually when conditions in the U.S. are more favorable than in
other markets, including the issuer's domestic market overseas.
Basis point
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One hundredth of one percent in the yield of an investment, i.e., 100 basis
points equals 1%.
Hedging/Currency management
- ---------------------------
An investment strategy that seeks to reduce the effects of currency fluctuations
on investor returns. There can be no assurance that currency hedging will be
beneficial to investors.
6
<PAGE>
DIVERSIFICATION BY SECURITY TYPE AS OF 6/30/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Type Of Security Percentage
- ------------------------------------------------------------
<S> <C>
Domestic Securities 42.1%
International Securities 33.9%
High Yield Securities 17.8%
Cash, Equivalents & Other Assets, less Liabilities 6.2%
</TABLE>
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Actual percentages will vary over time.
impact of shifting currency values. Of course, currency risk cannot be entirely
eliminated and there can be no guarantee that hedging will be successful in
managing currency risk.
Are there other areas where you had investment success?
We believed there were some attractive opportunities for the Fund among
split-rated securities. These are securities that may receive different ratings
from different rating agencies--perhaps BBB from one agency and BB from another.
Since that can make a bond a hybrid between high-grade and high-yield, it may
not be attractive to all investors. By doing our homework, we were able to
identify value among these types of issues and buy some split-rated bonds that
performed well. Of course, we have always stayed within prospectus guidelines.
Can you tell us more about the Fund's convertible investments?
After the Fund got underway, we allocated about 6% of its assets to convertible
securities, split between the high-yield and domestic investment-grade portions
which proved highly successful. Four of the five biggest contributors to the
Fund's performance were convertible securities.
The Fund's best performer was a Bethlehem Steel convertible preferred stock that
provided a 10% yield and modest capital appreciation potential. Bethlehem Steel
was benefiting from cost cutting, rising steel prices, and the automotive boom.
Another top performer was a Consolidated Natural Gas convertible bond maturing
in 2015. The bond was investment grade, had a 7 1/4% coupon, a short maturity, a
good deal of upside potential, and limited downside. The bond provided almost a
20% annualized return and remains a significant holding.
National Bank of Australia, one of that nation's largest banks, offered a $25
convertible preferred with a 7 7/8% dividend that also did exceedingly well for
the Fund. With its strong upside potential, the preferred provided an annualized
20% return for the Fund, with very little risk to investors.
[GRAPHIC]
7
<PAGE>
We also purchased the zero-coupon bonds of Alza, an investment-grade biotech
company. The bonds are particularly attractive due to a short two-year put
option which is attached to the bond. In addition, a modest conversion premium
should allow us to participate in 50% of the appreciation potential of the
stock, with limited downside risk.
Were there any holdings that didn't perform to expectations?
Alliance Entertainment was a high-yield company looking for a financial partner
to help the company turn its situation around. Unfortunately, the needed
investor never materialized and the company declared bankruptcy in July. Placer
Dome is a Canadian gold mining company. As a high-cost producer with heavy
leverage, they were particularly hard hit when gold prices plummeted to
exceedingly low levels.
What steps are you taking to manage risk?
The Fund's broad diversification across multiple bond market sectors may help
reduce risk for investors. Within the domestic market, we're also investing in
securities with different economic triggers. Treasuries will benefit from the
higher real returns on U.S. bonds relative to bonds elsewhere in the world. That
has attracted a good deal of foreign capital, which has helped the Fund.
Bethlehem Steel and other securities the Fund owns may do well if the economy
stays strong. Treasuries are likely to do well if the economy is moderate to
weak. Although we can't say for sure how strong the economy will be, the Fund's
holdings include bonds that may benefit either way.
Having high-grade securities may help moderate the risk of high-yield bonds, and
having high-yield bonds can offer return potential few high-grade issues can
provide. Overall, the Fund's quality rating is BBB, or investment grade. We
believe the Fund is an attractive choice for income investors who seek a blended
return while moderating the risks inherent in investing in any single bond
market sector.
What is your outlook for the future?
With spreads at historically low levels, the market is not without risk. In the
United States, rising inflation or rapid economic growth could undermine the
bond markets, forcing the Federal Reserve Board to eventually increase
short-term interest rates. Conversely, any signs of a slowdown, whether
triggered by a stronger U.S. dollar or an external event, would be a potential
negative for the high-yield market. This market is largely factoring in a
modest-growth, low-inflation scenario. Internationally, we believe
restructuring, European unification, and an improving Japanese economy are
potential positives. So we remain cautiously optimistic. Whatever happens, we
will continue to seek current income and competitive overall return by investing
primarily in domestic and foreign debt securities.
Neil Feinberg
Joseph Portera
Frank A. Salem
Steven Tananbaum
Portfolio Managers
[GRAPHIC]
High-yield securities carry higher risks and some of the Fund's investments have
speculative characteristics. Investments in foreign securities may be subject to
greater risks than domestic investments. These risks include currency
fluctuations, changes in U.S. or foreign tax or currency laws, and changes in
monetary policies and economic and political conditions in foreign countries.
8
<PAGE>
PORTFOLIO COMPOSITION AS OF 6/30/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percentage
- ---------------------------------------------------------------
<S> <C>
Foreign Bonds 29.4%
Corporate Bonds 23.1%
Asset-Backed Securities 11.3%
Yankee Bonds 9.9%
U.S. Government & Federal Agencies 9.2%
Brady Bonds 4.5%
Convertible Bonds 3.7%
Cash, Equivalents & Other Assets, less Liabilities 6.2%
All Other 2.7%
</TABLE>
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Actual percentages will vary over time.
[GRAPHIC]
9
<PAGE>
Fund & Lipper Returns as of 6/30/97
<TABLE>
<CAPTION>
Fund average annual total returns*
- --------------------------------------------------------------------------------
Life of Fund
through 6/30/97
<S> <C>
Class A 2.97%
Class B 2.68%
- --------------------------------------------------------------------------------
<CAPTION>
Fund SEC returns*
- --------------------------------------------------------------------------------
Life of Fund
through 6/30/97
<S> <C>
Class A -1.66%
Class B -2.32%
- --------------------------------------------------------------------------------
<CAPTION>
Fund's Lipper+ category return as of 6/30/97
- --------------------------------------------------------------------------------
Life of Fund
through 6/30/97
<S> <C>
Average Lipper
multisector income fund 2.60%
- --------------------------------------------------------------------------------
<CAPTION>
Fund per share net asset values & distributions through 6/30/97
- --------------------------------------------------------------------------------
NAV 6/30/97 Income Capital Gains
<S> <C> <C> <C>
Class A $10.12 $0.1749 $0.0000
Class B $10.11 $0.1563 $0.0000
- --------------------------------------------------------------------------------
</TABLE>
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* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested.
Class A shares are sold with a maximum initial sales charge of 4.5% and an
annual 12b-1 fee of .25%. Class B shares of the Fund are sold with no
initial sales charge, but are subject to a maximum CDSC of up to 5% if
shares are redeemed during the first 6 years of purchase and an annual
12b-1 fee of up to 1%.
+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales
charges. Lipper averages listed above are not class specific. Life of Fund
return is from the initial offering of both share classes on 2/28/97
through 6/30/97. For the Life of Fund period, the Lipper multisector income
fund category included 83 funds.
[GRAPHIC]
10
<PAGE>
Top 10 Holdings as of 6/30/97
<TABLE>
<CAPTION>
HOLDING COUNTRY AMOUNT
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<S> <C> <C>
SK Telecom Co. Ltd., 7.75%, due 4/29/04 United States $1,114,480
Republic of Colombia, 8.375%, due 2/15/27 United States 1,085,146
Consolidated Natural Gas Co., 7.25%, due 12/15/15 United States 1,081,250
Ontario (Province of), 15.25%, due 8/31/12 United States 1,073,610
Airplanes Pass-Through Trust, Series 1--Class C
8.15%, due 3/15/19 United States 1,041,020
Asset Securitization Corp., Series 1997--D4 Class A1D
7.49%, due 4/14/27 United States 1,031,800
Capital One Bank, Series BKNT, 7.15%, due 9/15/06 United States 1,010,950
Viacom, Inc., 6.75%, due 1/15/03 United States 961,600
Bethlehem Steel Corp., $3.50 United States 944,531
Alza Corp., (zero coupon), due 7/14/14 United States 880,000
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</TABLE>
[GRAPHIC]
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This breakdown is provided for informational purposes only. The Fund's holdings
may change daily. A shareholder owns shares of the Fund but does not own a
direct interest in any of the specific securities listed. Short-term securities
and U.S. government and federal agency issues are excluded. See Portfolio of
Investments for specific type of security held.
11
<PAGE>
10 Largest Purchases for the period ended 6/30/97
<TABLE>
<CAPTION>
SECURITY COUNTRY AMOUNT OF PURCHASE
- -----------------------------------------------------------------------------------------
<S> <C> <C>
United Kingdom Treasury Bonds, 8.00%--10.00%
due 2/26/01--12/7/15 United Kingdom $2,733,264
Buoni Poliennali del Tesoro, 6.78%--12.00%
due 8/1/97--11/1/26 Italy 2,196,997
Republic of Colombia, 8.375%, due 2/15/27 United States 2,045,241
Zurich Capital Trust I, 8.376%, due 6/1/37 United States 1,773,438
First Empire Capital Trust I, 8.234%--8.277%
due 2/1/27--6/1/27 United States 1,662,249
Ontario (Province of), 6.25%--15.25%
due 10/29/01--8/31/12 Canada 1,523,167
Export-Import Bank of Korea, 6.375%--6.50%
due 2/15/06--11/15/06 United States 1,265,300
Australian Government, 7.00%--13.00%
due 4/15/00--7/15/05 Australia 1,253,486
Asset Securitization Corp., 7.41%--7.49%
due 1/13/27--4/14/27 United States 1,106,248
SK Telecom Co. Ltd., 7.75%, due 4/29/04 United States 1,090,171
- -----------------------------------------------------------------------------------------
10 Largest Sales for the period ended 6/30/97
<CAPTION>
SECURITY COUNTRY AMOUNT OF SALE
- -----------------------------------------------------------------------------------------
<S> <C> <C>
United Kingdom Treasury Bonds, 8.00%--10.00%
due 2/26/01--12/7/15 United Kingdom $1,365,434
Swedbank, 7.7734%, due 10/29/49 United States 1,018,500
Altos Hornos de Mexico, 11.375%
due 4/30/02 United States 1,007,500
Zurich Capital Trust I, 8.376%, due 6/1/37 United States 1,002,500
Australian Government, 7.00%--13.00%
due 4/15/00--7/15/05 Australia 995,086
Placer Dome, Inc., 8.50%, due 12/31/45 United States 956,540
Republic of Colombia, 8.375%, due 2/15/27 United States 950,800
Export-Import Bank of Korea, 6.375%--6.50%
due 2/15/06--11/15/06 United States 913,760
Standard Chartered PLC, 5.8375%, due 1/29/49 United States 870,775
First Empire Capital Trust I, 8.234%--8.277%
due 2/1/27--6/1/27 United States 837,271
- -----------------------------------------------------------------------------------------
</TABLE>
[GRAPHIC]
- ----------
This breakdown is provided for informational purposes only. The Fund's holdings
may change daily. All purchases and sales are aggregated by issuer. A
shareholder owns shares of the Fund but does not own a direct interest in any of
the specific securities listed. Short-term securities and U.S. government and
federal agency issues are excluded. See Portfolio of Investments for specific
type of security held.
12
<PAGE>
Portfolio of Investments June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
Principal
Amount Value
======================================
LONG-TERM BONDS (91.1%)+
<S> <C> <C>
ASSET-BACKED SECURITIES (11.3%)
AIRCRAFT LEASES (2.0%)
Airplanes Pass-Through Trust
Series 1-Class C
8.15%, due 3/15/19 ................. $ 1,000,000 $ 1,041,020
------------
COMMERCIAL MORTGAGE LOANS (COLLATERALIZED
MORTGAGE OBLIGATIONS)(2.1%)
Asset Securitization Corp.
Series 1997-MD7 Class A1B
7.41%, due 1/13/27 ................. 95,000 97,554
Series 1997-D4 Class A1D
7.49%, due 4/14/27 ................. 1,000,000 1,031,800
------------
1,129,354
------------
CONSUMER LOANS (1.1%)
Green Tree Recreational
Equipment & Consumer Trust
Series 1997-B Class A1
6.55%, due 7/15/28 ................. 580,000 578,637
------------
CREDIT CARD RECEIVABLES (0.2%)
Bank One Credit Card Master Trust
Series 1995-A Class A
6.15%, due 7/15/02 ................. 110,000 109,067
------------
FIRST MORTGAGE LOANS (COLLATERALIZED
MORTGAGE OBLIGATIONS)(4.1%)
CWMBS, Inc.
Series 1997-E Class 4
10.00%, due 7/25/27 ................ 495,506 521,520
Nascor
Series 1997-10 Class A2
6.50%, due 1/25/07 ................. 500,000 497,250
North American Mortgage Co.
Series 1997-2
10.00%, due 7/25/27 ................ 525,000 556,973
Residential Accredit Loans, Inc.
Series 1997-QS4 Class A4
10.00%, due 5/25/27 ................ 69,546 73,648
Series 1997-QS5
10.00%, due 7/25/27 ................ 500,000 528,045
------------
2,177,436
------------
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
<TABLE>
<CAPTION>
Principal
Amount Value
======================================
MANUFACTURED HOUSING (1.8%)
<S> <C> <C>
Green Tree Financial Corp.
Series 1997-4 Class A7
7.36%, due 2/15/29 ................. $ 500,000 $ 495,000
Mid-State Trust VI
Class A4
7.79%, due 7/1/35 .................. 500,000 503,985
------------
998,985
------------
Total Asset-Backed Securities
(Cost $5,997,352) .................. 6,034,499
------------
BRADY BONDS (4.5%)
FOREIGN GOVERNMENTS (4.5%)
Brazil National Government
6.00%, due 9/15/13 ................. 1,000,000 768,750
Republic of Argentina
Series FRB
6.75%, due 3/31/05 (d) ............ 144,530 135,768
Republic of Poland
Series RSTA
3.25%, due 10/27/24 (d) ............ 1,000,000 635,000
Republic of Venezuela
Series W-A
6.75%, due 3/31/20 (j) ............ 500,000 393,437
Series W-A
6.8125%, due 3/31/20 (d)(j) ........ 250,000 220,937
United Mexican States
Series B
6.375%, due 12/31/19 (d)(i) ........ 250,000 232,187
------------
Total Brady Bonds
(Cost $2,314,412) .................. 2,386,079
------------
CONVERTIBLE BONDS (3.7%)
DRUGS (1.6%)
Alza Corp.
(zero coupon), due 7/14/14 ......... 2,000,000 880,000
------------
GAS UTILITIES (2.1%)
Consolidated Natural Gas Co.
7.25%, due 12/15/15 ................ 1,000,000 1,081,250
------------
Total Convertible Bonds
(Cost $1,899,917) .................. 1,961,250
------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
MainStay Strategic Income Fund
<TABLE>
<CAPTION>
Principal
Amount Value
======================================
CORPORATE BONDS (23.1%)
<S> <C> <C>
BANKS (3.4%)
Capital One Bank
Series BKNT
7.15%, due 9/15/06 ................. $ 1,000,000 $ 1,010,950
First Empire Capital Trust I
8.234%, due 2/1/27 ................. 830,000 833,312
------------
1,844,262
------------
BUILDINGS (1.1%)
Greystone Homes, Inc.
10.75%, due 3/1/04 ................. 450,000 492,750
Standard Pacific Corp. ...............
8.50%, due 6/15/07 ................. 100,000 99,500
------------
592,250
------------
CABLE (1.0%)
American Telecasting, Inc.
(zero coupon), due 6/15/04
14.50%, beginning 6/15/99 .......... 150,000 48,000
Heartland Wireless
Communications, Inc.
14.00%, due 10/15/04 ............... 85,000 36,550
Marcus Cable Operations Co. L.P.
(zero coupon), due 8/1/04
13.50%, beginning 8/1/99 ........... 125,000 108,750
UIH Australia/Pacific
Communications, Inc.
Series B
(zero coupon), due 5/15/06
14.00%, beginning 5/15/01 .......... 200,000 120,000
United International Holdings, Inc.
Series B
(zero coupon), due 11/15/99 ........ 300,000 231,750
------------
545,050
------------
CASINOS (0.5%)
Casino America, Inc.
12.50%, due 8/1/03 ................. 35,000 36,138
Casino Magic Finance Corp.
11.50%, due 10/15/01 ............... 90,000 80,100
El Comandante Capital Corp.
11.75%, due 12/15/03 ............... 45,000 45,450
President Riverboat Casinos, Inc.
13.00%, due 9/15/01 ................ 140,000 114,800
------------
276,488
------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
======================================
CELLULAR TELEPHONE (0.2%)
<S> <C> <C>
CCPR Services, Inc.
10.00%, due 2/1/07 (c) ............ $ 100,000 $ 99,000
------------
COMPUTERS & OFFICE EQUIPMENT (0.1%)
Unisys Corp.
11.75%, due 10/15/04 ............... 40,000 43,700
------------
CONSUMER DURABLES (2.0%)
Samsonite Corp.
11.125%, due 7/15/05 ............... 483,000 538,545
Selmer Co., Inc.
11.00%, due 5/15/05 ................ 500,000 550,000
------------
1,088,545
------------
DRUGS (1.0%)
Merck & Co., Inc.
5.76%, due 5/3/37 .................. 500,000 504,795
------------
ELECTRIC UTILITIES (0.3%)
CMS Energy Corp.
8.125%, due 5/15/02 ................ 150,000 151,500
------------
EQUIPMENT FINANCING (0.4%)
GPA Delaware, Inc.
8.75%, due 12/15/98 ................ 200,000 204,500
------------
FINANCE (1.0%)
TTB Finance Cayman Ltd.
6.763%, due 3/18/07 (d) ............ 500,000 500,000
------------
FOOD, BEVERAGES & TOBACCO (0.7%)
Colorado Prime Corp.
12.50%, due 5/1/04 (c)(n) .......... 1,200 121,200
North Atlantic Trading, Inc.
11.00%, due 6/15/04 (c) ............ 100,000 101,250
RJR Nabisco, Inc.
8.50%, due 7/1/07 .................. 150,000 149,363
------------
371,813
------------
HEALTH CARE (1.3%)
Abbey Healthcare Group, Inc.
9.50%, due 11/1/02 ................. 480,000 494,400
Magellan Health Services, Inc.
Series A
11.25%, due 4/15/04 ................ 170,000 189,550
------------
683,950
------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Portfolio of Investments (unaudited) continued
<TABLE>
<CAPTION>
Principal
Amount Value
======================================
CORPORATE BONDS (Continued)
<S> <C> <C>
INDUSTRIAL (0.4%)
Thermadyne Holdings Corp.
10.75%, due 11/1/03 ................ $ 200,000 $ 209,500
------------
INSURANCE (1.7%)
American General Institutional
Capital, Series B
8.125%, due 3/15/46 (c) ............ 145,000 145,992
Zurich Capital Trust I
8.376%, due 6/1/37 (c) ............ 750,000 776,497
------------
922,489
------------
LEISURE (0.2%)
Bally's Health & Tennis Corp.
13.00%, due 1/15/03 ................ 125,000 129,375
------------
MEDIA (3.2%)
General Media, Inc.
10.625%, due 12/31/00 .............. 50,000 44,000
PanAmSat L.P.
(zero coupon), due 8/1/03
11.375%, beginning 8/1/98 .......... 200,000 194,828
SCI Television, Inc.
11.00%, due 6/30/05 ................ 500,000 531,875
Viacom, Inc.
6.75%, due 1/15/03 ................. 1,000,000 961,600
------------
1,732,303
------------
PUBLISHING (0.2%)
Affiliated Newspaper Investments, Inc.
(zero coupon), due 7/1/06
13.25%, beginning 7/1/99 ........... 150,000 134,438
------------
RECREATION & ENTERTAINMENT (0.1%)
Alliance Entertainment Corp.
Series B
11.25%, due 7/15/05 (k) ............ 160,000 34,400
AMC Entertainment, Inc.
9.50%, due 3/15/09 (c) ............ 30,000 30,675
------------
65,075
------------
RESTAURANTS & LODGING (0.3%)
AFC Enterprises, Inc.
10.25%, due 5/15/07 (c) ............ 75,000 75,000
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
======================================
RESTAURANTS & LODGING (Continued)
<S> <C> <C>
Flagstar Corp.
10.875%, due 12/1/02 ............... $ 100,000 $ 101,500
------------
176,500
------------
RETAIL (2.5%)
Barnes & Noble, Inc.
Series B
11.875%, due 1/15/03 ............... 500,000 542,500
Dayton-Hudson Co.
5.895%, due 6/15/37 ................ 500,000 499,300
Eckerd Corp.
9.25%, due 2/15/04 ................. 200,000 212,000
Sears Roebuck Acceptance Corp.
6.95%, due 5/15/02 ................. 100,000 100,725
------------
1,354,525
------------
SUPERMARKETS (0.4%)
Dominick's Finer Foods, Inc.
10.875%, due 5/15/05 ............... 30,000 33,150
------------
TELECOMMUNICATION EQUIPMENT (0.4%)
Telex Communications, Inc.
10.50%, due 5/1/07 (c) ............ 250,000 258,750
------------
TELECOMMUNICATION SERVICES (0.7%)
Globalstar L.P. Capital Corp.
11.25%, due 6/15/04 (c) ............ 100,000 94,000
Metrocall, Inc.
10.375%, due 10/1/07 ............... 50,000 46,000
Tele-Communications, Inc.
9.25%, due 4/15/02 ................. 250,000 268,923
------------
408,923
------------
Total Corporate Bonds
(Cost $12,300,685) ................. 12,330,881
------------
FOREIGN BONDS (29.4%)
ARGENTINA (0.3%)
Argentina Bocon Previs
Series Pre1
3.242%, due 4/1/01 (d).............. AP 142,838 131,871
------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
MainStay Strategic Income Fund
<TABLE>
<CAPTION>
Principal
Amount Value
======================================
FOREIGN BONDS (Continued)
<S> <C> <C>
AUSTRALIA (2.1%)
Australian Government
Series 904
9.00%, due 9/15/04 ................. A$ 308,000 $ 258,550
Federal National Mortgage
Association
Series E
6.50%, due 7/10/02 ................. 270,000 199,233
Queensland Treasury Corp.
Series New
8.00%, due 5/14/03 ................. 122,000 97,014
Series 7
8.00%, due 9/14/07 ................. 177,000 140,096
South Australian Government
Series 00
12.50%, due 10/15/00 ............... 500,000 445,150
------------
1,140,043
------------
CANADA (1.7%)
Alberta (Province of)
Series BU
9.60%, due 7/7/98 .................. C$ 477,000 363,826
Canadian Government
Series A76
9.00%, due 6/1/25 .................. 50,000 45,621
Series H74
10.00%, due 6/1/08 ................. 73,000 67,481
Series A33
11.50%, due 9/1/00 ................. 109,000 92,967
Ontario (Province of)
7.25%, due 9/27/05 ................. 380,000 288,966
9.75%, due 10/29/01 ................ 60,000 49,871
------------
908,732
------------
DENMARK (1.7%)
Kingdom of Denmark
7.00%, due 12/15/04 ................ DK 1,237,000 199,894
8.00%, due 11/15/01 ................ 814,000 137,837
Nykredit
Series ANN
6.00%, due 10/1/26 ................. 3,960,000 542,574
------------
880,305
------------
FRANCE (0.4%)
France Obligations Assimilables
du Tresor
7.50%, due 4/25/05 ................. FF 118,000 22,895
8.25%, due 2/27/04 ................. 270,000 54,120
8.50%, due 3/28/00 ................. 310,000 59,012
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
======================================
FRANCE (Continued)
<S> <C> <C>
France Obligations Assimilables
du Tresor
8.50%, due 11/25/02 ................ FF 322,000 $ 64,593
8.50%, due 12/26/12 ................ 46,000 9,822
------------
210,442
------------
GERMANY (5.3%)
Bayerische VBK New York
4.50%, due 6/24/02 ................. DM 585,000 332,408
Depfa Bank
Series 436
5.75%, due 3/4/09 .................. 164,000 92,377
International Bank of
Reconstruction & Development
7.125%, due 4/12/05 ................ 425,000 269,141
Land Baten-Wuerttemberg
Series 38
7.50%, due 10/22/04 ................ 290,000 186,979
Ministry of Finance Russia
9.00%, due 3/25/04 ................. 775,000 455,429
Ontario (Province of)
6.25%, due 1/13/04 ................. 160,000 96,503
Republic of Deutschland
Series 94
6.25%, due 1/4/24 .................. 138,000 77,049
Treuhandanstalt
6.25%, due 3/4/04 .................. 1,155,000 703,791
7.375%, due 12/2/02 ................ 262,000 168,459
Venezuela Synthetic Sovereign
Investments Ltd.
10.125%, due 12/29/03 .............. 740,000 440,577
------------
2,822,713
------------
IRELAND (1.0%)
Irish Government
6.25%, due 4/1/99 .................. IP 42,000 63,615
6.25%, due 10/18/01 ................ 200,000 308,209
8.25%, due 8/18/15 ................. 26,000 44,892
8.75%, due 9/30/12 ................. 42,000 75,622
9.75%, due 6/1/98 .................. 40,000 62,300
------------
554,638
------------
ITALY (3.8%)
Bayerische Landesbank
Girozentrale
10.75%, due 3/1/03 ................. IL 800,000,000 558,608
Buoni Poliennali del Tesoro
7.25%, due 11/1/26 ................. 85,000,000 49,465
7.50%, due 10/1/99 ................. 205,000,000 124,132
8.50%, due 8/1/97 .................. 20,000,000 11,715
9.50%, due 2/1/01 .................. 230,000,000 149,088
9.50%, due 2/1/06 .................. 500,000,000 343,390
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE>
Portfolio of Investments (unaudited) continued
<TABLE>
<CAPTION>
Principal
Amount Value
======================================
FOREIGN BONDS (Continued)
<S> <C> <C>
ITALY (Continued)
Buoni Poliennali del Tesoro
10.50%, due 7/15/00 ................ IL 305,000,000 $ 200,501
10.50%, due 4/1/05 ................. 135,000,000 96,328
12.00%, due 5/1/02 ................. 710,000,000 510,575
------------
2,043,802
------------
NEW ZEALAND (2.0%)
Federal National Mortgage
Association
7.25%, due 6/20/02.................. ND 590,000 393,871
New Zealand Government
6.50%, due 2/15/00 ................. 950,000 641,726
------------
1,035,597
------------
SOUTH AFRICA (0.6%)
Republic of South Africa
Series 150
12.00%, due 2/28/05 ................ ZAR 1,575,000 309,616
------------
SPAIN (1.6%)
Spanish Government
7.35%, due 3/31/07 ................. SP 5,730,000 41,744
7.90%, due 2/28/02 ................. 10,240,000 76,264
8.30%, due 12/15/98 ................ 1,390,000 9,862
10.50%, due 10/30/03 ............... 23,210,000 195,788
11.30%, due 1/15/02 ................ 64,470,000 537,964
------------
861,622
------------
SWEDEN (2.4%)
Ab Spintab
Series 164
8.50%, due 12/19/01................. SK 2,000,000 282,189
Stadshypotek Ab
Series 1553
10.00%, due 12/20/00 ............... 4,000,000 584,404
Swedish Government
Series 1035
6.00%, due 2/9/05 .................. 2,600,000 329,368
Series 1030
13.00%, due 6/15/01 ................ 600,000 97,847
------------
1,293,808
------------
UNITED KINGDOM (4.6%)
Abbey National Treasury Services
8.00%, due 4/2/03................... (Pound)201,000 341,618
Bayerische Landesbank
Girozentrale
7.875%, due 12/7/06 ................ 90,000 154,400
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
======================================
UNITED KINGDOM (Continued)
<S> <C> <C>
European Investment Bank
8.75%, due 8/25/17 ................. (Pound)210,000 $ 395,867
Federal National Mortgage
Association
6.875%, due 6/7/02 ................. 100,000 164,312
United Kingdom Treasury Bonds
8.00%, due 12/7/15 ................. 56,000 101,502
9.50%, due 4/18/05 ................. 219,000 415,737
10.00%, due 2/26/01 ................ 483,000 874,195
------------
2,447,631
------------
UNITED STATES (1.9%)
Bonos Del Tesoro
Series BT02
8.75%, due 5/9/02 .................. $ 725,000 725,580
Nacional Financiera SNC
9.375%, due 4/23/99 (c) ............ 300,000 306,750
------------
1,032,330
------------
Total Foreign Bonds
(Cost $15,728,004) ................. 15,673,150
------------
U.S. GOVERNMENT &
FEDERAL AGENCIES (9.2%)
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (MORTGAGE
PASS-THROUGH SECURITY)(5.7%)
7.50%, due 12/31/30 TBA (g) ........ 3,000,000 3,008,640
------------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION I (MORTGAGE
PASS-THROUGH SECURITY) (0.8%)
7.50%, due 7/25/27 TBA (g) ......... 415,000 418,245
------------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION II (MORTGAGE
PASS-THROUGH SECURITY) (1.8%)
7.125%, due 6/20/23 ARM (h) ........ 942,247 969,930
------------
UNITED STATES TREASURY NOTE (0.9%)
7.875%, due 11/15/04 ............... 450,000 485,649
------------
Total U.S. Government &
Federal Agencies
(Cost $4,857,367) .................. 4,882,464
------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE>
MainStay Strategic Income Fund
<TABLE>
<CAPTION>
Principal
Amount Value
======================================
YANKEE BONDS (9.9%)
<S> <C> <C>
BANKS (0.7%)
Export-Import Bank of Korea
6.50%, due 11/15/06 ................ $ 355,000 $ 343,672
------------
CABLE (0.1%)
Kabelmedia Holdings GmbH
(zero coupon), due 8/1/06
13.625%, beginning 8/1/01 .......... 90,000 54,900
------------
CELLULAR TELEPHONE (0.1%)
Millicom International Cellular, S.A.
(zero coupon), due 6/1/06
13.50%, beginning 6/1/01 ........... 100,000 73,000
------------
FOOD, BEVERAGES & TOBACCO (0.1%)
Fresh Del Monte Produce N.V.
Series B
10.00%, due 5/1/03 ................. 70,000 72,275
------------
FOREIGN GOVERNMENTS (5.5%)
Ontario (Province of)
15.25%, due 8/31/12 ................ 1,000,000 1,073,610
Republic of Colombia
8.375%, due 2/15/27 ................ 1,120,000 1,085,146
Republic of South Africa
8.50%, due 6/23/17 ................. 780,000 775,838
------------
2,934,594
------------
MEDIA (0.6%)
Grupo Televisa, S.A.
11.875%, due 5/15/06 ............... 300,000 338,250
------------
TELECOMMUNICATION SERVICES (2.8%)
Call-Net Enterprises, Inc.
(zero coupon), due 12/1/04
13.25%, beginning 12/1/99 .......... 250,000 216,250
Ionica, PLC
(zero coupon), due 5/1/07
15.00%, beginning 5/1/02 (o) ....... 25,000 132,500
SK Telecom Co. Ltd.
7.75%, due 4/29/04 ................. 1,095,000 1,114,480
------------
1,463,230
------------
Total Yankee Bonds
(Cost $5,236,102) .................. 5,279,921
------------
Total Long-Term Bonds
(Cost $48,333,839) ................. 48,548,244
------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
======================================
COMMON STOCKS (0.2%)
<S> <C> <C>
CELLULAR TELEPHONE (0.0%)(b)
AirTouch Communications, Inc. (a) .... 160 $ 4,380
------------
ELECTRIC UTILITIES (0.2%)
PECO Energy Co. ...................... 5,300 111,300
------------
Total Common Stocks
(Cost $110,603) .................... 115,680
------------
PREFERRED STOCKS (2.4%)
CELLULAR TELEPHONE (0.1%)
AirTouch Communications, Inc.
6.00%, Series B (f) ................ 1,800 51,300
------------
MEDIA (0.5%)
CD Radio, Inc.
5% Delayed Preferred
Stock (a)(c)(f) ................... 1,564 48,484
Paxson Communications Corp.
12.50% (e) ......................... 107 112,515
Spanish Broadcasting System, Inc.
14.25% (c)(e) ...................... 125 120,000
------------
280,999
------------
STEEL, ALUMINUM & OTHER METALS (1.8%)
Bethlehem Steel Corp.
$3.50 (c)(f) ....................... 23,250 944,531
------------
Total Preferred Stocks
(Cost $1,165,468) .................. 1,276,830
------------
<CAPTION>
Principal
Amount
================
OPTIONS (0.1%)
<S> <C> <C>
UNITED STATES (0.1%)
Deutshce Mark Put/U.S. Dollar Call
Strike price DM 1.695
Expires 8/25/97 .................... $ 755,000 21,879
Strike price DM 1.745
Expires 9/15/97 .................... 980,000 13,360
------------
Total Options
(Cost $25,105) ..................... 35,239
------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
<PAGE>
Portfolio of Investments (unaudited) continued
<TABLE>
<CAPTION>
Principal
Amount Value
======================================
SHORT-TERM INVESTMENTS (11.2%)
<S> <C> <C>
COMMERCIAL PAPER (8.1%)
American Express Credit Corp.
5.565%, due 7/15/97 ................ $ 2,000,000 $ 2,000,000
Prudential Funding Co.
5.536%, due 7/2/97 ................. 2,300,000 2,300,000
------------
4,300,000
------------
U.S. TREASURY NOTE (3.1%)
5.875%, due 7/31/97 ................ 1,645,000 1,645,510
------------
Total Short-Term Investments
(Cost $5,946,479) .................. 5,945,510
------------
Total Investments
(Cost $55,581,494)(l) .............. 105.0% 55,921,503(m)
Liabilities in Excess of
Cash and Other Assets .............. (5.0) (2,642,958)
------------ ------------
Net Assets ........................... 100.0% $ 53,278,545
============ ============
</TABLE>
- ----------
(a) Non-income producing securities.
(b) Less than one tenth of a percent.
(c) May be sold to institutional investors only.
(d) Floating rate. Rate shown is the rate in effect at June 30, 1997.
(e) PIK ("Payment in Kind")--interest or dividend payment is made with
additional securities.
(f) Convertible preferred stocks.
(g) TBA: Securities purchased on a forward commitment basis with an approximate
principal amount and maturity date. The actual principal amount and the
maturity date will be determined upon settlement.
(h) ARM-Adjustable Rate Mortgage. Resets annually.
(i) Issued with Value Recovery Rights. For every $1.00 in face value of
discount bonds, the holder receives $1.538 in notional Value Recovery
Rights.
(j) Issued with oil-linked certificates. Each certificate represents 1,250
oil-linked payment obligations.
(k) Issuer in bankruptcy.
(l) The cost stated also represents the cost for Federal income tax purposes.
(m) At June 30, 1997, net unrealized appreciation was $429,030, based on cost
for Federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $530,910 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $101,880.
(n) 1,200 Units--each unit reflects $1,000 principal amount of Senior Notes,
plus 0.19608 warrants to acquire 1 share of common stock at $100.00 per
share at a future date.
(o) 25,000 Units--each unit reflects $1,000 principal amount of Senior
Discounted Notes, plus 1 warrant to acquire 19.619 shares of common stock
at $0.10 per share at a future date.
(p) The following abbreviations are used in the above portfolio:
AP--Argentinean Peso
A$--Australian Dollar
C$--Canadian Dollar
DK--Danish Krone
DM--Deutsche Mark
FF--French Franc
IP--Irish Punt
IL--Italian Lira
ND--New Zealand Dollar
(Pound)--Pound Sterling
ZAR--South African Rand
SP--Spanish Peseta
SK--Swedish Krona
$ --U.S. Dollar
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
<PAGE>
Statement of Assets and Liabilities as of June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investment in securities, at value (identified cost $55,581,494) ............................................ $55,921,503
Cash denominated in foreign currencies (identified cost $73,280) ............................................. 74,006
Receivables:
Investment securities sold ................................................................................. 2,984,210
Dividends and interest ..................................................................................... 975,944
Fund shares sold ........................................................................................... 354,628
Unrealized net appreciation on forward foreign currency contracts ............................................ 92,523
Unamortized organization expense ............................................................................. 200,320
-----------
Total assets .............................................................................................. 60,603,134
-----------
LIABILITIES:
Payables:
Investment securities purchased ............................................................................ 6,800,450
Custodian .................................................................................................. 68,209
NYLIFE Distributors ........................................................................................ 31,955
Adviser .................................................................................................... 6,118
Transfer agent ............................................................................................. 3,376
Fund shares redeemed ....................................................................................... 805
Trustees ................................................................................................... 169
Accrued expenses ............................................................................................. 121,498
Dividend payable ............................................................................................. 292,009
-----------
Total liabilities ......................................................................................... 7,324,589
-----------
Net assets ................................................................................................... $53,278,545
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized:
Class A .................................................................................................... $ 28,401
Class B .................................................................................................... 24,267
Additional paid-in capital ................................................................................... 52,559,160
Accumulated undistributed net investment income .............................................................. 56,541
Accumulated undistributed net realized gain on investments ................................................... 181,146
Net unrealized appreciation on investments ................................................................... 340,009
Net unrealized appreciation on translation of assets and liabilities in foreign currencies and forward
foreign currency contracts ................................................................................. 89,021
-----------
Net assets ................................................................................................... $53,278,545
===========
CLASS A
Net assets applicable to outstanding shares .................................................................. $28,739,447
===========
Shares of beneficial interest outstanding .................................................................... 2,840,093
===========
Net asset value per share outstanding ........................................................................ $ 10.12
Maximum sales charge (4.50% of offering price) ............................................................... 0.48
-----------
Maximum offering price per share outstanding ................................................................. $ 10.60
===========
CLASS B
Net assets applicable to outstanding shares .................................................................. $24,539,098
===========
Shares of beneficial interest outstanding .................................................................... 2,426,715
===========
Net asset value and offering price per share outstanding ..................................................... $ 10.11
===========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
<PAGE>
Statement of Operations
for the period February 28* through June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Income:
Dividends ........................................................................................ $ 29,922
Interest ......................................................................................... 1,004,334
-----------
Total income .................................................................................... 1,034,256
-----------
Expenses:
Administration ................................................................................... 40,344
Advisory ......................................................................................... 40,344
Distribution--Class B ............................................................................ 36,617
Service .......................................................................................... 33,620
Shareholder communication ........................................................................ 18,155
Custodian ........................................................................................ 13,419
Transfer agent ................................................................................... 11,322
Professional ..................................................................................... 8,856
Amortization of organization expense ............................................................. 8,166
Registration ..................................................................................... 6,575
Recordkeeping .................................................................................... 5,598
Trustees ......................................................................................... 379
Miscellaneous .................................................................................... 3,094
-----------
Total expenses before reimbursement ............................................................. 226,489
Expense reimbursement from Administrator and Adviser ............................................... (35,220)
-----------
Net expenses .................................................................................... 191,269
-----------
Net investment income .............................................................................. 842,987
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain from:
Security transactions ............................................................................ 96,497
Foreign currency transactions .................................................................... 84,649
-----------
Net realized gain on investments and foreign currency transactions ................................. 181,146
-----------
Net unrealized appreciation on investments:
Security transactions ............................................................................ 340,009
Translation of assets and liabilities in foreign currencies and forward foreign currency contracts 89,021
-----------
Net unrealized gain on investments and foreign currencies .......................................... 429,030
-----------
Net realized and unrealized gain on investments and foreign currency transactions .................. 610,176
-----------
Net increase in net assets resulting from operations ............................................... $ 1,453,163
===========
</TABLE>
- ----------
* Commencement of operations.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
February 28, 1997*
through
June 30, 1997**
==================
INCREASE IN NET ASSETS:
<S> <C>
Operations:
Net investment income ......................................................................................... $ 842,987
Net realized gain on investments .............................................................................. 96,497
Net realized gain on foreign currency transactions ............................................................ 84,649
Net unrealized appreciation on investments .................................................................... 340,009
Net unrealized appreciation on translation of assets and liabilities in foreign currencies and
forward foreign currency contracts ........................................................................... 89,021
------------
Net increase in net assets resulting from operations .......................................................... 1,453,163
------------
Dividends to shareholders:
From net investment income:
Class A ...................................................................................................... (480,207)
Class B ...................................................................................................... (306,239)
------------
Total dividends to shareholders .............................................................................. (786,446)
------------
Capital share transactions: Net proceeds from sale of shares:
Class A ...................................................................................................... 8,125,041
Class B ...................................................................................................... 21,588,215
Net asset value of shares issued to shareholders in reinvestment of dividends:
Class A ...................................................................................................... 299,409
Class B ...................................................................................................... 155,530
------------
30,168,195
Cost of shares redeemed:
Class A ...................................................................................................... (59,783)
Class B ...................................................................................................... (496,584)
------------
Increase in net assets derived from capital share transactions ............................................. 29,611,828
------------
Net increase in net assets ................................................................................. 30,278,545
NET ASSETS:
Beginning of period ............................................................................................. 23,000,000
------------
End of period ................................................................................................... $ 53,278,545
============
Accumulated undistributed net investment income ................................................................. $ 56,541
============
</TABLE>
- ----------
* Commencement of operations.
** Unaudited.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
22
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A Class B
========== ==========
February 28, 1997*
through
June 30, 1997**
==========================
<S> <C> <C>
Net asset value at beginning of period .......................... $ 10.00 $ 10.00
---------- ----------
Net investment income ........................................... 0.18 0.16
Net realized and unrealized gain on investments ................. 0.08 0.08
Net realized and unrealized gain on foreign currency transactions 0.03 0.03
---------- ----------
Total from investment operations ................................ 0.29 0.27
---------- ----------
Less dividends:
From net investment income .................................... (0.17) (0.16)
---------- ----------
Net asset value at end of period ................................ $ 10.12 $ 10.11
========== ==========
Total investment return (a) ..................................... 2.97% 2.68%
Ratios (to average net assets)/Supplemental Data:
Net investment income ......................................... 6.54%+ 5.79%+
Net expenses .................................................. 1.15%+ 1.90%+
Expenses (before reimbursement) ............................... 1.41%+ 2.16%+
Portfolio turnover rate ......................................... 129% 129%
Net assets at end of period (in 000's) .......................... $ 28,740 $ 24,539
</TABLE>
- ----------
* Commencement of operations.
** Unaudited.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is not
annualized.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
23
<PAGE>
MainStay Strategic Income Fund
Note 1--Organization and Business:
The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business
Trust. The Trust is registered under the Investment Company Act of 1940, as
amended, (the "Act") as an open-end management investment company and is
comprised of fourteen funds. These financial statements and notes relate only to
MainStay Strategic Income Fund (the "Fund").
The Fund commenced operations on February 28, 1997, and currently offers two
classes of shares. Class A shares are offered at net asset value per share plus
an initial sales charge. Class B shares are offered without an initial sales
charge, although a declining contingent deferred sales charge may be imposed on
redemptions made within six years of purchase. Class A shares and Class B shares
bear the same voting (except for issues that relate solely to one class),
dividend, liquidation and other rights and conditions except that the Class B
shares are subject to higher distribution fee rates. Each class of shares bears
distribution and/or service fee payments under a distribution plan pursuant to
Rule 12b-1 under the Investment Company Act of 1940.
The Fund's primary objective is to provide current income and competitive
overall return by investing primarily in domestic and foreign debt securities.
Note 2--Significant Accounting Policies:
The following is a summary of significant accounting policies followed by the
Fund:
Valuation of Fund Shares. The net asset value per share of each class of shares
is calculated on each day the New York Stock Exchange (the "Exchange") is open
for trading as of the close of regular trading on the Exchange. The net asset
value per share of each class of shares is determined by taking the assets
attributable to a class of shares, subtracting the liabilities attributable to
that class, and dividing the result by the outstanding shares of that class.
Securities Valuation. Portfolio securities of the Fund are stated at value
determined (a) by appraising common and preferred stocks which are traded on the
New York Stock Exchange at the last sale price on that day or, if no sale
occurs, at the mean between the closing bid and asked prices, (b) by appraising
common and preferred stocks traded on other United States national securities
exchanges or foreign securities exchanges as nearly as possible in the manner
described in (a) by reference to their principal exchange, including the
National Association of Securities Dealers National Market System, (c) by
appraising over-the-counter securities quoted on the National Association of
Securities Dealers NASDAQ system (but not listed on the National Market System)
at the bid price supplied through such system, (d) by appraising
over-the-counter securities not quoted on the NASDAQ system at prices supplied
by the pricing agent or brokers selected by the Adviser, if these prices are
deemed to be representative of market values at the regular close of business of
the New York Stock Exchange, (e) by appraising debt securities at prices
supplied by a pricing agent selected by the Adviser, whose prices reflect
broker/dealer supplied valuations and electronic data processing techniques if
those prices are deemed by the Adviser to be representative of market values at
the regular close of
24
<PAGE>
Notes to Financial Statements (unaudited)
business of the New York Stock Exchange (f) by appraising options and futures
contracts at the last sale price on the market where such options or futures are
principally traded, and (g) by appraising all other securities and other assets,
including debt securities for which prices are supplied by a pricing agent but
are not deemed by the Adviser to be representative of market values, but
excluding money market instruments with a remaining maturity of sixty days or
less and including restricted securities and securities for which no market
quotations are available, at fair value in accordance with procedures approved
by the Trustees. Short-term securities which mature in more than 60 days are
valued at current market quotations. Short-term securities which mature in 60
days or less are valued at amortized cost if their term to maturity at purchase
was 60 days or less, or by amortizing the difference between market value on the
61st day prior to maturity and market value on maturity date if their original
term to maturity at purchase exceeded 60 days.
Events affecting the values of certain portfolio securities that occur between
the close of trading on the principal market for such securities (foreign
markets and over-the-counter markets) and the regular close of the New York
Stock Exchange will not be reflected in the Fund's calculation of net asset
value unless the Adviser believes that the particular event would materially
affect net asset value, in which case an adjustment would be made.
Forward Currency Contracts. A forward currency contract is an agreement to buy
or sell currencies of different countries on a specified future date at a
specified rate. During the period the forward currency contract is open, changes
in the value of the contract are recognized as unrealized gains or losses by
"marking to market" such contract on a daily basis to reflect the market value
of the contract at the end of each day's trading. When the forward currency
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transaction and
the Fund's basis in the contract. The Fund enters into forward currency
contracts in order to hedge its foreign currency denominated investments,
receivables and payables against adverse movements in future foreign exchange
rates.
The use of forward currency contracts involves, to varying degrees, elements of
market risk in excess of the amount recognized in the statement of assets and
liabilities. The contract or notional amounts reflect the extent of the Fund's
involvement in these financial instruments. Risks arise from the possible
movements in the foreign exchange rates underlying these instruments. The
unrealized appreciation/ depreciation on forward contracts reflects the Fund's
exposure at period end to credit loss in the event of a counterparty's failure
to perform its obligations.
25
<PAGE>
MainStay Strategic Income Fund
Forward foreign currency contracts open at June 30, 1997:
<TABLE>
<CAPTION>
Value on Unrealized
Contract Trade Current Appreciation/
Amount Date Value (Depreciation)
======================= ============= ============= ==============
<S> <C> <C> <C> <C>
Foreign Currency Sale Contracts
- -------------------------------
Australian Dollar, expiring 7/7/97-9/3/97 A$ 1,220,000 $ 951,913 $ 914,213 $ 37,700
Danish Krone, expiring 7/22/97 DK 3,890,000 592,348 587,456 4,892
Deutsche Mark, expiring 7/7/97-10/20/97 DM 16,220,269 9,487,975 9,330,700 157,275
French Franc, expiring 8/18/97 FF 2,395,000 411,601 409,306 2,295
Irish Punt, expiring 9/17/97 IP 375,000 571,886 565,082 6,804
Italian Lira, expiring 8/1/97 IL 1,790,000,000 1,056,146 1,050,730 5,416
Japanese Yen, expiring 7/7/97 (Yen) 94,250,800 820,000 824,600 (4,600)
New Zealand Dollar, expiring 7/23/97 ND 1,515,000 1,041,411 1,026,152 15,259
Pound Sterling, expiring 7/7/97 (Pound) 914,000 1,477,223 1,520,849 (43,626)
Spanish Peseta, expiring 8/1/97 SP 91,000,000 628,654 618,982 9,672
Swedish Krona, expiring 7/24/97-8/1/97 SK 11,330,000 1,480,405 1,467,022 13,383
Swiss Franc, expiring 7/10/97-9/29/97 CF 1,520,700 1,054,737 1,048,957 5,780
-------------
210,250
-------------
Foreign Currency Buy Contracts
- ------------------------------
Canadian Dollar, expiring 7/16/97 C$ 1,599,339 1,158,979 1,160,607 1,628
Deutsche Mark, expiring 7/7/97-9/29/97 DM 11,025,210 6,460,200 6,338,815 (121,385)
French Franc, expiring 8/18/97-8/20/97 FF 14,195,000 2,472,437 2,426,017 (46,420)
Italian Lira, expiring 8/1/97 IL 1,350,000,000 797,090 792,450 (4,640)
Japanese Yen, expiring 7/7/97 (Yen) 96,408,000 780,000 843,473 63,473
Pound Sterling, expiring 9/17/97 (Pound) 349,800 571,886 580,774 8,888
Spanish Peseta, expiring 7/16/97 SP 12,800,000 88,398 87,053 (1,345)
Swedish Krona, expiring 8/1/97 SK 3,650,000 475,508 472,660 (2,848)
Swiss Franc, expiring 7/10/97-9/29/97 CF 1,534,108 1,070,577 1,055,499 (15,078)
-------------
(117,727)
-------------
Net Appreciation $ 92,523
=============
</TABLE>
Restricted Securities. A restricted security is a security which has been
purchased through a private offering and cannot be resold to the general public
without prior registration under the Securities Act of 1933. Disposal of these
securities may involve time-consuming negotiations and expense, and prompt sale
at an acceptable price may be difficult. The Fund may not invest more than 10%
of its net assets in illiquid securities. At June 30, 1997 the Fund held no
restricted securities.
26
<PAGE>
Notes to Financial Statements (unaudited) continued
Organizational Costs. Costs incurred in connection with the Fund's initial
organization and registration totalled approximately $208,486 and are being
amortized over 60 months beginning at the commencement of operations.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Investment income received by a Fund from foreign sources may be subject to
foreign income taxes withheld at the source.
Dividends and Distributions to Shareholders. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
monthly. Income dividends and capital gain distributions are determined in
accordance with Federal income tax regulations which may differ from generally
accepted accounting principles.
Security Transactions and Investment Income. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued daily except
when collection is not expected. Discounts on securities purchased for the Fund
are accreted on the constant yield method over the life of the respective
securities or, if applicable, over the period to the first call date.
Income from payment-in-kind securities is recorded daily based on the effective
interest method of accrual.
The Fund invests in high yield bonds. These bonds may involve special risks not
commonly associated with investment in higher rated debt securities. High yield
bonds may be more susceptible to real or perceived adverse economic and
competitive industry conditions than higher grade bonds. Also, the secondary
market on which high yield bonds are traded may be less liquid than the market
for higher grade bonds.
Expenses. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when allocations of direct expenses can otherwise fairly be
made. The investment income and expenses (other than expenses incurred under the
Distribution Plan) and realized and unrealized gains and losses on investments
of the Fund are allocated to separate classes of shares based upon their
relative net asset value on the date the income is earned or expenses and
realized and unrealized gains and losses are incurred.
Foreign Currency Investing. The books and records of the Fund are recorded in
U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the
mean between the buying and selling rates last quoted by any major U.S. bank at
the following dates:
27
<PAGE>
MainStay Strategic Income Fund
(i) market value of investment securities, other assets and liabilities--at the
valuation date,
(ii) purchases and sales of investment securities, income and expenses--at the
date of such transactions.
The assets and liabilities of the Fund are presented at the exchange rates and
market values at the close of the period. The changes in net assets arising from
fluctuations in exchange rates and the changes in net assets resulting from
changes in market prices are not separately presented. However, gains and losses
from certain foreign currency transactions are treated as ordinary income for
Federal income tax purposes.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on forward currency contracts, net currency gains or losses realized
as a result of differences between the amounts of securities sale proceeds or
purchase cost, dividends, interest and withholding taxes as recorded on the
Fund's books, and the U.S. dollar equivalent amount actually received or paid.
Net currency gains or losses from valuing such foreign currency denominated
assets and liabilities at year end exchange rates are reflected in unrealized
foreign exchange gains.
There are certain risks involved in investing in foreign securities that are in
addition to the usual risks inherent in domestic instruments. These risks
include those resulting from future adverse political and economic developments
and possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions.
Foreign cash held at June 30, 1997:
<TABLE>
<CAPTION>
Currency Cost Value
==================================================== ========= =========
<S> <C> <C> <C> <C>
Argentinean Peso AP 3,586 $ 3,586 $ 3,586
Australian Dollar A$ 6,158 4,626 4,614
Canadian Dollar C$ 6,893 4,962 4,996
Danish Krone DK 8,382 1,299 1,264
Deutsche Mark DM 6,010 3,475 3,449
Irish Punt IP 2,184 3,267 3,295
Italian Lira IL 3,920,676 2,324 2,305
Pound Sterling (Pound) 24,280 39,699 40,409
Spanish Peseta SP 2 0(a) 0(a)
Swedish Krona SK 78,000 10,042 10,088
--------- ---------
$ 73,280 $ 74,006
========= =========
</TABLE>
- ----------
(a) Less than one dollar.
Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
28
<PAGE>
Notes to Financial Statements (unaudited) continued
Note 3--Fees and Related Party Policies:
Investment Advisory and Administration Fees. MacKay-Shields Financial
Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an
Investment Advisory Agreement. MacKay-Shields is a registered investment adviser
and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New
York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect
wholly-owned subsidiary of New York Life, is the Administrator for the Fund.
The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an annual
rate of 0.30% of the average daily net assets of the Fund. The Adviser and the
Administrator have jointly agreed to voluntarily reduce their fees payable by
the Fund to the extent necessary such that total expenses do not exceed on an
annual basis 1.15% and 1.90% of the average daily net assets for Class A and B
shares, respectively, until such time as the Fund reaches $100 million in assets
or one year from the date of the Fund's commencement of operations, whichever
may occur first.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"). The
Fund, with respect to each class of shares, has adopted a Distribution Plan (the
"Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Class A Plan, the Distributor receives payments from the Fund at
an annual rate of 0.25% of the average daily net assets of the Fund's Class A
shares, which is an expense of the Class A shares of the Fund for distribution
or service activities as designated by the Distributor. Pursuant to the Class B
Plan, the Fund's Class B shares are subject to the payment of a monthly
distribution fee, which is an expense of the Class B shares of the Fund, at the
annual rate of 0.75% of the average daily net assets of the Fund's Class B
shares. The Distribution Plan provides that the Class B shares of the Fund also
incur a service fee at the annual rate of 0.25% of the average daily net asset
value of the Class B shares of the Fund. Service fee as shown on the statement
of operations represents the fees for both Class A shares and Class B shares.
The Plan provides that the distribution fee is payable to NYLIFE Distributors
regardless of the amounts actually expended by NYLIFE Distributors for
distribution of the Fund's shares and service activities.
NYLIFE Distributors anticipates that its actual distribution expenditures will
substantially exceed the distribution fee received by it during the initial
years of the operation of the Plan and that in later years, its expenditures may
be less than the distribution fee.
Sales Charges. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $5,030 for the period
February 28, 1997, through June 30, 1997. The Fund was also advised that NYLIFE
Distributors retained contingent deferred sales charges for redemption of Class
B shares of $1,143 for the same period.
29
<PAGE>
MainStay Strategic Income Fund
Trustees Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee
of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus
reimbursement for travel and out-of-pocket expenses. The Trust allocates this
expense in proportion to the net assets of the respective Funds.
Capital. At June 30, 1997, New York Life held shares of Class A with a net asset
value of $20,594,897, which represents 83.9% of the Class A net assets at period
end. NYLIFE Distributors held shares of Class B with a net asset value of
$5,134,344, which represents 20.9% of the Class B net assets at period end.
Other. NYLIFE Distributors has received $285 for providing the Fund certain
transfer agency services for the period February 28, 1997, through April 30,
1997. Effective May 1, 1997, MainStay Shareholder Services Inc. ("MSS"), an
indirect wholly owned subsidiary of New York Life Insurance Company, was
appointed Transfer, Dividend Disbursing and Shareholder Servicing Agent. MSS was
paid $257 for services rendered May 1, 1997, through June 30, 1997.
Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $111 for the period February 28,
1997, through June 30, 1997.
Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the period February 28, 1997, through June 30,
1997, amounted to $5,598.
Note 4--Purchases and Sales of Securities (in 000's):
During the period February 28, 1997, through June 30, 1997, purchases and sales
of U.S. Government securities were $25,495 and $19,341, respectively. Purchases
and sales of securities, other than U.S. Government securities, securities
subject to repurchase transactions and short-term securities, were $67,728 and
$24,419, respectively.
Note 5--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
February 28* through
June 30, 1997**
=====================
Class A Class B
======= =======
<S> <C> <C>
Shares sold ........................................ 816 2,161
Shares issued in reinvestment of dividends ......... 30 16
------ ------
846 2,177
Shares redeemed .................................... (6) (50)
------ ------
Net increase ....................................... 840 2,127
====== ======
</TABLE>
- ----------
* Commencement of operations.
** Unaudited.
30
<PAGE>
This page intentionally left blank
31
<PAGE>
The MainStay Funds
<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund graph indicating of companies in expanding markets and are willing to accept a higher
risk/reward of with strong growth potential level of risk for higher return potential
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in a portfolio that tracks You seek a conservative way to partici-
Equity Index Fund graph indicating the makeup and returns of the pate in the growth potential of stocks+
risk/reward of S&P 500*
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Offers broad diversification into You prefer the higher return potential
International Equity Fund graph indicating international stock markets with of international equities or want to
risk/reward of an emphasis on risk control add diversification to your domestic
Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Convertible Fund [Horizontal bar Invests in convertible securities for You want income from securities that
As of 6/2/97, this Fund graph indicating a special blend of long-term growth may offer growth potential if converted
was closed to new risk/reward of potential and dividend income into common stock
investors. Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Balances current income with growth You seek a combination of income and
Total Return Fund graph indicating opportunities by investing in stocks, growth potential and want to manage
risk/reward of bonds, and money market instruments risk through diversification
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks undervalued stocks with You seek to maximize total return from
Value Fund graph indicating attractive dividends and a stimulus securities which may have more poten-
risk/reward of for positive change tial than the market currently sees
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's.
+ The original investment is guaranteed provided it is held for 10 years with
all dividend and capital gain distributions reinvested. If shares are
redeemed prior to or after the one-day guarantee date, the investor loses
the benefit of the guarantee with respect to those shares.
++ Investments in foreign securities may be subject to greater risks than
domestic investments. These risks include currency fluctuations, changes in
U.S. or foreign tax or currency laws, and changes in monetary policies and
economic and political conditions in foreign countries.
(S) While individual securities owned by the Government Fund may be guaranteed
by the U.S. government and its agencies, the share price of the Fund is not
guaranteed and will fluctuate with market conditions.
|| Certain of the Fund's investments may be speculative.
# Investments in the Money Market Fund are neither insured nor guaranteed by
the U.S. government and there is no assurance that the Fund will be able to
maintain a stable net asset value of $1.00 per share; investment returns
will vary with market conditions.
** A small portion of the Fund's income may be subject to state and local
taxes and the Alternative Minimum Tax. Capital gains, if any, may also be
taxed.
32
<PAGE>
<TABLE>
<CAPTION>
INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Seeks a high level of current income You are seeking to combine high
Government Fund graph indicating consistent with safety of principal current income and safety of principal
risk/reward of primarily from U.S. government
Fund] securities(S)
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield [Horizontal bar An aggressive high-yield bond You want to maximize current income
Corporate Bond Fund graph indicating fund that is actively managed for and can accept the higher risk of
risk/reward of maximum current income|| securities with high yield potential
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current yields and You prefer the higher return potential
International Bond Fund graph indicating competitive total return from non- of international bonds or want to
risk/reward of U.S. bonds with an emphasis on add diversification to your domestic
Fund] risk control investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating stability of principal, and liquidity, competitive yields on cash you're plan-
risk/reward of with free checkwriting# ning to spend or invest in the near future
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks current income and competi- You seek to combine the return potential
STRATEGIC INCOME FUND graph indicating tive overall return by investing in of high-grade, high-yield,|| and inter-
risk/reward of a diversified portfolio of domestic national bonds and want to manage risk
Fund] and foreign debt securities++ through multimarket diversification
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are a California resident and want to
California Tax Free Fund graph indicating from both federal and California keep more of what you earn by invest-
risk/reward of income taxes consistent with ing for income that's double tax free**
Fund] preservation of capital**
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are a New York State or City resident
New York Tax Free Fund graph indicating from federal, New York State, and and want to keep more of what you earn
risk/reward of New York City income taxes consis- with income that's double or triple tax
Fund] tent with preservation of capital** free**
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You are in a high federal income tax
Tax Free Bond Fund graph indicating from regular federal income tax con- bracket or want to pay less of your
risk/reward of sistent with preservation of capital** investment income to the IRS
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A word about risk and reward
The "thermometers" in the tables above show how much risk the investor must
assume and the related return potential. Generally speaking, investments with
higher return potential also carry higher risks. So, the longer the indicator
bar, the higher the risk and reward potential of the Fund.
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send any money. Shares
must be offered in the investor's state of residence.
33
<PAGE>
- --------------------------------------------------------------------------------
MAINSTAY
Strategic Income Fund
- --------------------------------------------------------------------------------
[GRAPHIC]
Semiannual Report
June 30, 1997
Unaudited
[LOGO] MAINSTAY(R)
FUNDS
Officers & Trustees
Alice T. Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
[LOGO] MAINSTAY(R) FUNDS
NYLIFE Distributors Inc.
Morris Corporate Center, Building A
300 Interpace Parkway
Parsippany, New Jersey 07054
Administrator & Distributor of The MainStay Funds
http://www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly owned subsidiary of
New York Life Insurance Company.
[LOGO] NEW YORK LIFE
This report is provided for the information of shareholders of the MainStay
Strategic Income Fund. It may be given to others only when preceded or
accompanied by an effective MainStay Funds prospectus. This report does not
offer to sell any securities or solicit orders to buy them.
(C)1997. All rights reserved.
[GRAPHIC] MSSA17-08/97
